CHAPTER 1

What is Finance?
Finance is related to decisions with money (cash flows)

1. Personal finance
2. Corporate finance

General areas of Finance

Financial institutions (Tổ chức tài chính) : banks, insurance companies, savings and
loans, credit union

The importance of finance in non-finance areas

Management

Marketing

Accounting

Information Systems

Economics
The difference between Finance and accounting:

Finance:

Planning and directing the financial transactions for an organization

Planning budgeting what will happen

Using financial statements for analysing and making decision

Accounting:  

Recording and reporting on those transactions

Recording what happened on the related accounts.

Making financial statements

The difference between real and financial asset:

Real asset:

Real assets are real estate, infrastructure, and commodities.

A physically observable or touchable

Item

Example: Building, land, equipment, real estate, …

Financial asset:

Financial assets include stocks, bonds.

An asset that represents a promise to distribute cash flow at some future time.

Example: Stock, bond, bank deposit,

Balance sheet

Asset Liability (Debt)

 A. Short term Equity (Vốn chủ sỏ hữu)
B. Long term

Stakeholders including:
 Manager
 Stakeholders  owner (agency theory)
 Customer
 Supplier
 Employees
 Society

Bankrupt: (Priorities payback list)

 Gor, suppliers, employees
 Debtholder
 Shareholder
 Preferred

Debt
Debt is an amount of money borrowed by one party from another.

Three features: the principle, interest, time to maturity

Priority to assets and earnings: interest on debt -> stock dividend; outstanding
debt -> stockholders can receive any proceeds.
Interest payment:

Most of the cases, investors receive interest payment that is computed as the
proportion of the outstanding principal amount.

In some cases, do not pay interest (discounted securities: securities selling for
less than their par value when issued, usually has maturities of equal to or less
than 1 year)

Maturity date: the date the principal amount is due.

No voting rights but can take control the management and operation of firms by
restricting the purpose use of borrowed funds.

Short term debt

Treasury bills (T-bills)
 Issued when government need to borrow funds.
 No interest rate -> discounted debt instruments
 Investors in T bills could be all participants in financial markets.
 Free of credit (default) risk, high liquidity
 Sold at a discount price from face value (par value). Value is the PV
of par value (PV=parvalue/(1+r)n)Treasury bills (T-bills)

Par value
PV =
(1+ r )n

Commercial paper
 Issue by large, financially sound firms to finance short term assets
(inventory, account receivable)
 No interest rate, sold at discount price from face value -> discounted
instrument.
 Yield is higher than yield of T-bills with the same maturity due to higher
risk and less liquidity.
Certificates of deposit
 Issued by depository institutions.
 Yield is higher than yield of T-bills because of higher risk and less
liquidity.
 Traditional CD: the owner must return to the issuing institution to
liquidate before the maturity date.
 Negotiable CDs: can be traded to other investors before the maturity
date.
 Return = interest + the difference between selling price and purchase
price

Repurchase agreements.
 Issue with an agreement to repurchase securities at a specified date and
price.
 Reverse repo: purchase securities with an agreement to sell them.

Federal Funds
 Overnight loans from one bank to another bank to meet the reserve
requirements.
 The rate is slightly higher than T-bills rate.
 Change in the volume of interbank loans in balance sheet of commercial
banks.
 Commercial banks are the mainly participants.

Banker’s Acceptances
 Show the bank responsibility for future payment.
 The most use is in international trade activities.
 Do not pay interest rate -> normally sold at discount before maturity.
LONG TERM DEBT

Term loan
 A loan normally obtained from a bank for a specific amount with an
agreement of making a payment consisting of interest and principal
amount.
 The interest rate can be either fixed or floating.

Bonds

Common bonds
EQUITY
Preferred stock:

 Mixed between bonds and common stocks à called as hybrid.

 Similar to bond (common stockholders’ perspective): has par (face) value, fixed
payment. However, not like bonds, the failure of this payment will not lead to
bankruptcy -> safer to use than debt.
 Like stock (bondholder perspective): reported in equity section.
 Use when: the company has considerable amount of debt (lenders do not want to lend
more funds) while its common shareholder does not willing to share their ownership.
 Priority to assets and earnings over common stockholders
 Cumulative dividend: preferred dividend must be paid before common dividend in the
current year if it was not paid in the previous year -> If not: company may not want to
pay dividend for several years, then pay a huge amount of common dividend and only
annual preferred dividend.
 Most of the preferred stock has no voting rights.
 Most of the preferred stock can be convert to common stock.

Common stock.

 Priority to assets and earnings be paid after debt and preferred dividend
 No obligation to pay dividend. The return is the capital gain (change in market value
of stock) and dividend.
  Income stock (pay constant dividend income) and growth stock (pay little or not
dividend to retain earning for growth, ex: Microsoft)
 No maturity
 Can be repurchase in the financial market.
• The company has no potential investment plan.
• The stock market price is undervalued.
• Increase the percentage of debt/assets.
• Increase ownership control.
 Has voting rights to elect BOD.
• Election usually is taken at the annual meeting.
• Proxy: a document giving the power to vote share for another
• Takeover: an action a company acquire and take control another

CHAPTER 2

Surplus units: participants who receive more money than they spend, such as investors.

Deficit units (Issuer) : participants who spend more money than they receive, such as
borrowers (corporation acting as deficit unit)

Securities: represent a claim on the issuers

 Debt securities - debt (also called credit or borrowed funds) incurred by the
issuer.
 Equity securities - (also called stocks) represent equity or ownership in the
firm.

Accommodating (Đáp ứng) Corporate Finance (deficit unit) Needs:

The financial markets serve as the mechanism whereby corporations (acting as deficit units)
can obtain funds from investors (acting as surplus units)

Accommodating Investment (surplus unit) Needs

Financial institutions serve as intermediaries (trung gian) to connect the investment
management activity with the corporate finance activity.

Comparison of Roles Among Financial Institutions

Primary markets – facilitate (tạo điều kiện) the issuance of new securities.

Secondary markets facilitate - the trading of existing securities,

which allows for a change in the ownership of the securities.

Liquidity is the degree to which securities can easily be liquidated (sold)

without a loss of value.

If a security is illiquid, investors may not be able to find a willing buyer for it in
the secondary market and may have to sell the security at a large discount just to
attract a buyer.

Securities can be classified as:

Money market securities (for short term): Facilitate the sale of short-term debt
securities from deficit unit to surplus unit.

Debt securities that have a maturity of one year or less. (Because its short term)
Capital market securities (for long term) : Facilitate the sale of long-term debt
from deficit to surplus unit.

Including:

 Bonds - long-term debt securities issued by the Treasury, government

agencies, and corporations to finance their operations.
 Mortgages - long-term debt obligations created to finance the purchase of
real estate.
 Mortgage-backed securities - debt obligations representing claims on a
package of mortgages.
 Stocks - represent partial ownership in the corporations that issued them.

Derivative securities: financial contracts whose values are derived from the
values of underlying assets.

 Speculation - allow an investor to speculate on movements in the value of

the underlying assets without having to purchase those assets.
 Risk management and hedging - financial institutions and other firms can
use derivative securities to adjust the risk of their existing investments in
securities.

Role of Financial Institutions

Financial institutions are needed to resolve the limitations caused by
market imperfections such as limited information regarding the
creditworthiness of borrowers.

Role of depository institutions – Depository institutions accept deposits from

surplus units and provide credit to deficit units through loans and purchases of
securities.
  Offer liquid deposit accounts to surplus units
 Provide loans of the size and maturity desired by deficit units.
 Accept the risk on loans provided.
 Have more expertise in evaluating creditworthiness.
 Diversify their loans among numerous deficits units

Depository Institutions include:

1. Commercial Banks

 The most dominant type of depository institution

 Transfer deposit funds to deficit units through loans or purchase of debt
securities

2. Savings Institutions

 Also called thrift institutions and include Savings and Loans (S&Ls) and
Savings Banks
 Concentrate on residential mortgage loans.

3. Credit Unions

 Nonprofit organizations
 Restrict business to CU members with a common bond.

Role of nondepository institutions

 Finance companies - obtain funds by issuing securities and lend the
funds to individuals and small businesses.
 Mutual funds - sell shares to surplus units and use the funds received to
purchase a portfolio (Danh mục đầu tư) of securities.
 Securities firms - provide a wide variety of functions in financial
markets. (Broker, Underwriter, Dealer, Advisory)
  Insurance companies - provide insurance policies that reduce the
financial burden associated with death, illness, and damage to property.
Charge premiums and invest in financial markets.
 Pension funds – manage funds until they are withdrawn for retirement.

Main source and use of fund in every single financial institution.

CHAPTER 3

Activities in a company
Operating Activities: are the functions of a business directly related to
providing its goods/services to the market (manufacturing, distributing,
marketing, and selling

goods/services).

Investment Activities:

+ Short-term investments (Ex: cash balance determination, inventory

determination, short-term securities investments…).

+ Long-term investments (Ex: fixed assets purchase, fixed-assets repairs, long-

term securities investments…).

Financing Activities: are transactions with creditors or investors used to fund

either company operations or expansions.

Definition of corporate finance

Cash flows are generated from 2 kinds of activities.

+ Cash inflows: is the money going into a business.

+ Cash outflows: is the money leaving the business.

Main decisions of corporate finance
Capital budgeting decisions: to describe the process of making and managing
expenditures on long- lived assets.

Capital structure decisions: to represent the proportions of the firm’s financing

from current liabilities, long-term debts, and owner’s equity.

Working capital management decisions: to manage the shortterm cash flow,

which is associated with a firm’s net working capital.

(Net working capital = current assets – current liabilities)

A sole proprietorship:

 is a business owned by 1 person.

 It is the cheapest business to form.
 No corporate income taxes.
  It has unlimited liability for business debts and obligations. No distinction
(Sự phân biệt) is made between personal and business assets.
 The life of the sole proprietorship is limited by the life of the sole
proprietor.
 Can not issues both stock and bonds.

A partnership:
 is formed by 2 or more people.
 2 categories: (i) general partnerships; (ii) limited partnerships
 It is usually inexpensive and easy to form.
 General partners have unlimited liability for all debts, whereas. limited
partners have limited liability.
 It is difficult for a partnership to raise large amounts of cash.
 Can not issues both stock and bonds.

because:

 unlimited liability;
 limited life of the enterprise
 difficulty of transferring ownership

A corporation:
 Is a business owned by many individual /institutional shareholders.
 Starting a corporation is more complicated than starting a proprietorship /
partnership.
 Shareholders of the corporation have limited liability.
  A corporation has ability to raise large amounts of capital. because: (i)
limited liability; (ii) unlimited life of the enterprise and (iii) easy transfer
of ownership.
 Double taxation
 Can issues both stock and bonds.

Limited liability company (LLC)

An LLC: is a hybrid between a partnership and a corporation.

Like corporations, LLC provide limited liability protection.

To operate and be taxed like a partnership.

Be able to issue Bond.

Joint stock company:

Be able to issues both Bond and stock.

Organization chart
Goal of financial management
+ Profitability objective: maintaining or increasing the firm’s profits.

+ Liquidity objective: ensuring that the firm is always able to meet

its obligations.

….

Goal: a firm may have various objectives, but the final goal of the
firm is to maximize the wealth of the firm’s owners.

+ Maximize value of the firm

+ Maximize market price of the firm’s stock.

Stockholder – manager conflicts

Managers are naturally inclined to act in their own best interests (which are not
always the same asthe interest of stockholders).

Agency relationship

But the following factors affect.

behavior:

+ Managerial compensation packages

+ Direct intervention by shareholders

+ The threat of firing

+ The threat of takeove

CHAPTER 4
Financial statement analysis involves using financial statements to evaluate the
financial position of the firm.

Who are interested in financial statement analysis?

+ Managers

+ External participants: Creditors, Investors

Managers: interested in their financial situation and performance → to plan and

control effectively

Creditors (suppliers, banks, bondholders):

Suppliers: interested in the liquidity of the firm.

Banks, bondholders: interested in the cash-flow ability of the firm to

pay debt over a long period of time.

Investors: interested in firm’s profitability, ability of the firm to pay

dividend and avoid bankruptcy.
Trend Analysis: comparing financial ratios of current year with ones of last
years -> identify the better or worse financial performance.

Industry comparisons: comparing financial ratios of a firm with ones of

industry average.

Basic steps to perform financial ratio analysis:

+ Measuring financial ratios.

+ Explaining these ratios.

+ Evaluating these ratios.

+ Drawing conclusions of firm financial performance, thus proposing

appropriate solutions to improve its performance.

Liquidity ratios

Another term: short term Solvency ratios

Current Ratio: shows a firm’s ability to cover its current liabilities with its
current assets.

Acid-test or Quick ratio: shows a firm’s ability to cover its current

liabilities with most liquid assets.
Cash ratio: shows a firm’s ability to cover its current liabilities with cash and
cash equivalents.

Financial leverage ratios

Another term: long term solvency ratios

Debt ratio (Debt-to-assets ratio): measures the extent to which the firm is
using borrowed money to finance its total assets.

Debt-to-equity ratio: measures the extent to which the firm is using borrowed
money compared with its equity

Coverage ratio: how well a company has its interest obligations covered (times-
interest-earned (TIE)
Asset management ratios
Another term: Turn over/ Activity ratio

Asset management ratios – measure how effectively the firm in using its assets
to generate sales.

Inventory turnover (IT): determines how many times that inventory turn over
during a period.

Inventory turnover in days (ITD): determines how many days that inventory sits on average
before it is sold.

Receivables turnover (RT): determines how many times that the company collect its account
receivables during a period.
Receivables turnover in days or average collection period (ACP): determines
how many days that the company collect its account receivables during a
period. (= DSO- Days Sales Outstanding)

Total Assets Turnover (TAT) : determines the how much the company generates sales for
every dollar in assets.

- Asset management ratio:

Buy product (Inventory turnover in days) Lower is better ->
sell product (Receivable Turn over in days) lower is better ->
collect.
(ROE tăng nhờ đòn bẩy tài chính rủi ro hơn)

Profitability ratios
Net profit margin (NPM): determines how much the company generates net
income for every dollar in sales

Return on Assets (ROA): determines how much the company generates net
income for every dollar in total assets

Return on Equity (ROE): determines how much the company generates net
income for every dollar in total equity

The Dupont Equation

Net income = revenue – (interest expense(bank loan) +
interest + tax)

Net income = Earning before interest and tax – (interest

expense + tax)

Gross profit = net revenue – cost of good sold

EBIT = Gross profit – operating expense

EBT = EBIT – I (Interest expense I guess)

EAT = EBIT – T

ROS = NPM (net profit margin)

Equity = Total asset – total debt
I = (Loan interest rate * total dept)
Business cycle:
Buy product (Inventory turnover in days) Lower is better ->
sell product (Receivable Turn over in days) lower is better ->
collect.
 Inventory turnover (higher the better)
 Receivable turnover (Higher the better)

CHAPTER 5

Yields
Yields (%return) = (Income + Capital gains)/Beginning value\

Debt income: interest

Equity income: dividend

Capital gains = Ending value – Beginning value

Beginning value: market value at the beginning of the period

Ending value: market value at the end of the period

 10000+ ( 99000−97000 )
=0,1237
97000

Factors affect the cost of money.

Production opportunity: the possible return from the investment

Time preference for consumption

Risk: higher risk, higher rate of return

Inflation: higher inflation, higher rate of return

Interest rate levels

Production opportunity: the possible return from the investment

Time preference for consumption

Risk: higher risk, higher rate of return

Inflation: higher inflation, higher rate of return

Market interest rate determination

Rate of return = Risk free rate + Risk premium
Securities with higher risks, investors required higher return

CHAPTER 6

● FV – Future Value

● n – Number of periods invested

● FVn: Future Value after n period invested

● CF – Cash Flow

● t – times

● CFt: Cash Flow initiates in the t times

● I – Interest amount

● i – Interest rate

● PV – Present Value

Opportunity cost of holding money

The most important reason.: Inflation, Risk

SIMPLE INTEREST

COMPOUND INTEREST
NOMINAL & EFFECTIVE INTERESTRATE
Nominal interest rate: A rate of interest quoted for a year that has not been adjusted for frequency
of compounding (APR-Annual Percentage Rate)

Effective interest rate: the actual rate of interest earned (paid) after adjusting the nominal rate for a
number of compounding periods per year (EAREffective Annual Rate)

FV OF A SINGLEAMOUNT
TYPES OF CASH FLOWS

OCCURRING AT THE END OF EACHPERIOD

OCCURRING AT THE BEGINNING OF EACH PERIOD

FV Ordinary annuity:
N = n-1

FV Annuity due

PV OF A SINGLEAMOUNT
PV OF A MIXED CASH FLOW
PV OF AN ANNUITY

Orinary annuity

Annuity Due:
CHAPTER 7

 Basic valuation

 Bond (Trai phieu) review

 Definition
 A long-term contract with an agreement that the issuer’s obligation is to
pay interest and principal on a specific date.
  Interest rate = Coupon rate (can be paid monthly, quarterly, semi-
annually, annually)
 The principal face value of the bond
 Common Bonds:
 Government bond: issued by the federal government, a state or local
government. Treasury notes (1 year to 10 years), treasury bond (exceeds
10 years)
 Municipal bond: issued by a state or local government.
 Corporate bonds: issued by corporation. Unlike term loan, corporate
bond can be sold to different investors.
 Mortgage (Thế chấp) bond is secured by fixed assets (Tài sản cố định).
 Debenture: unsecured bond, issued by strong companies
 Zero coupon bond: pays no interest but sold at a discount of par value.
 Junk bond: corporate bond that have high risk.

 Bond valuation

P: the intrinsic value of a bond (Bond value)

F: face value of a bond
r’: coupon rate
r: discount rate (The market required rate of return)
C: coupon interest payment (= F * r’)
n: number of years until maturity
 Annual interest compounding bond

 Semiannual interest compounding bond

 Zero-coupon bond

BEHAVIOR OF BOND PRICES

A higher bond price is associated with a lower market required rate of

return.

High Bond price = > low market required rate of return (Discount rate)
vise versa

The market required rate of return = coupon rate

intrinsic value of bond = face value (sell at par)

The market required rate of return < coupon rate.

intrinsic value of bond > face value (sell at a premium

The market required rate of return > coupon rate.

intrinsic value of bond < face value (sell at discount)

INTEREST RATE RISK

The intrinsic value of a bond (P) > the market value of a stock (MP)

should buy this bond.

The intrinsic value of a bond (P) < the market value of a stock (MP)

should sell this bond.

YTM formula
 TYPES OF STOCKS

 Dividend Discounted Model (DDM)

COMMON STOCK VALUATION FOR 1-YEAR
INVESTMENT
 Expected return identification (r)

 Common stock value for 1-year investment

The intrinsic value of a stock (P) > the market value of a stock (MP)
should buy this stock.
The intrinsic value of a stock (P) < the market value of a stock (MP)
should sell this stock.

DISCOUNT RATE
CAPM formula:

r: expected return of the stock

rf: risk-free rate
rm: expected return of the market portfolio.
β: Beta coefficient.
ZERO GROWTH STOCK VALUATION

CONSTANT GROWTH STOCKS (GORDON)

 Estimating the growth rate
Assumptions:
 the growth rate in dividends is also the growth rate in earnings under the
assumption that the dividend payout ratio remains constant (g=constant)
 the future retention ratio is equal to the past retention ratio.
 the expected return on current retained earning is equal to the past return on
equity which is known as ROE.
 Earning next year = Earning this year + Retained Earning this year * Return on
Retained Earning
 g = Retention Ratio * ROE

(RR - Retention ratio is the proportion of earnings kept back in the business as retained earnings)

NON-CONSTANT GROWTH STOCKS