1) Knowledge and understanding. After studying this module you should be able to:
- analyze the relationships among the different financing sources available to a firm, mainly debt and equity, and compare and contrast the benefits and costs of each source with respect to the others;
- compare and contrast differences and similarities between the Miller-Modigliani framework for the choice of the optimal financing mix and the real-world ways of choosing this financing mix;
- know the inputs and the outputs of the operating income approach and of the cost of capital approach, in particular focus on the concepts of earnings before interest and taxes (EBIT) and free cash flows to the firm (FCFF);
- remind the concepts of probability density and cumulative probability distribution and the concept of present value of annuities in the compounded interest case, with a particular focus on geometrically increasing perpetuities;
- remind the basic equation for the profit of a firm and the difference between fixed and variable costs; remind the notion of contribution margin;
- know the data needed to perform the depreciation/amortization of a capital asset;
- know the mathematical calculations characterizing the five depreciation/amortization methods implemented in Microsoft Excel, namely the straight-line method, the declining balance method, the sum-of-the-years’ digits method, the double-declining balance method, and the variable-declining balance method;
- know the replacement methods used for deteriorating items (depreciation or leasing approaches) and sudden failure items (statistical approach);
- know the differences between forecasting and planning, between quantitative and qualitative forecasting, and critically assess forecasts;
- know the quantitative forecasting made out of a time series by means of moving averages; know the exponential smoothing of a series of data to make forecasts by weighting observations; decide the weights of the observations through the choice of the values of some parameters done with the goal of minimizing the mean absolute deviation and mean squared error between forecasted and observed values.
2) Skills, qualities, and attributes. After studying this module you should be able to:
- apply Microsoft Excel to implement the operating income approach and the cost of capital approach for the choice of the optimal financing mix;
- know how the inputs of the previous approaches can be approximated by data available in income statements and balance sheets of firms, by ratings of financial instruments such as stock and bonds issued by firms and traded in financial markets, by other financial data such as interest rates and spreads; use the Microsoft Excel functions NORMSDIST, NORMSINV, and VLOOKUP;
- use the Microsoft Excel functions SLN, DB, SYS, DDB, and VDB for the depreciation/amortization of a capital asset and know the drawbacks of these functions;
- use the Microsoft Excel functions HLOOKUP, OFFSET, and NPV for the depreciation approach to the replacement of deteriorating assets;
- use the Microsoft Excel functions MATCH and INDEX, and the Microsoft Excel Solver for the leasing approach to the replacement of deteriorating assets;
- use the Microsoft Excel Solver for the optimal choice of the values of the damping parameter and of the three parameters characterizing the Holt-Winters’ method in the framework of exponential smoothing.