Tourism financial management

FINANCIAL
MANAGEMENT
Ekrem Tufan
etufan@yahoo.com
http:etufan.wordpress.com
Canakkale Onsekiz Mart University
School of Tourism and Hotel Management

What will we learn?
1. An overview of managerial finance
-Managerial finance in the 1990s
-The financial manager’s responsibility
-The goals of the corporation

What will we learn?
2. The financial environment: Turkish
Markets, institutions
- Financial markets
- Financial institutions

What will we learn?
3. Analysis of financial statements
- The income statement
- The balance sheet
- Ratio analysis
4. Risk and rates of return
-Defining and measuring risk
-Expected rate of return

What will we learn?
5. Strategic long-term investment
decisions
-Generating ideas for capital projects
-Project classifications
-Similarities between capital
budgeting evaluation techniques

What will we learn?
6. Capital budgeting evaluation
techniques
-Payback period method
-Net present value method
-Internal rate of return method

What will we learn?
6. Practice of NPV and IRR methods
-Example of NPV
-Example of IRR
-Example of sensitivity analysis
Continuation of examples…
So on, so far…

What kind of resources can we
use when we doing research?
1. All finance books
2. All articles about finance
3. www.ssrn.com
4. www.makalem.com
5. www.ceterisparibus.com
6. Essentials of Managerial Finance, J. Fred
Weston and Eugene Brigham, Harcourt
Brace&Company International Edition, 1992. (The
main book of our lesson!)

What is the finance?
• Money
• Stock exchange
• Banks
• What else?
• How about the companies?
• Balance sheetBalance sheet.xls

What is the finance?
To achieve the goals of company;
1. Finding funds from the most suitable
sources
2. Using them effectively and
3. Control the results…

An Overview of Managerial
Finance
A Short History of Managerial Finance
• 1930s: Liabilities and equity
• 1940 and 1950s: Assets, quantitative methods,
discounted cash flow methods
• 1960 and 1970s: Optimization of assets and
liabilities and equity, statistical methods
• 1980s: Globalization, interest rate and exchange
risk
• 1990s to today: More risk, more computer, new
financial instruments and methods

Today’s World
Kaynak: www.economywatch.com/world_economy (2011 estimation)
World GDP (PPP): $78.092 trillion
GDP Growth Rate: 3.3%
GDP Per Capita (PPP): $11,100
GDP By Sector: Services 63.4%, Industry 30.8%, Agriculture 5.8%
Growth In Trade Volume: 6.953%
Industrial Production Growth Rate: 4.6%
Population: 6.768 billion
Population Growth Rate: 1.133%
Urban Population: 50.5%
Urbanization Rate: 1.85% (125 million people move to cities every year)
The Poor (Income below $2 per day): Approx 3.25 billion (~ 50%)
Millionaires: Approx 10 million (~ 0.15%)
Labor Force: 3.232 billion
Inflation Rate - Developed Countries: 2.5%
Inflation Rate - Developing Countries: 5.6%
Unemployment Rate: 8.8%
Investment: 23.4% of GDP
Public Debt: 58.3% of GDP
Please also have a look at http://worldbank.tumblr.com/day/2013/02/12/

Turkish Economy Macro Economic Indicators
Resource: http://www.mahfiegilmez.com/p/gostergeler.html

Finance
The Financial Manager’s Responsibility
• Forecasting and planning
• Major investment and control
• Coordination and control
• Dealing with the financial markets

Finance
The goals of the corporation
• Managerial incentives to maximize
shareholder wealth
• Social responsibility
• Stock price maximization and social
welfare

The Financial Environment:
Markets, Institutions
The Financial Markets
• Physical asset markets
• Spot markets and futures markets
• Money markets
• Mortgage markets
• World, national, regional and local markets
• Primary markets-secondary markets

Markets, Institutions
Financial Institutions in Turkey
1. Commercial banks
2. Pension funds
3. Mutual funds
4. Life insurance companies
5. Stock exchange (ISE)
6. Gold exchange (IGE)
7. Turkish Derivatives Exchange

Markets, Institutions in Turkey
Stock Exchanges
• Istanbul Stock Exchange ISE
• Istanbul Gold Exchange IGE
• Turkish Derivatives Exchange TD
• Over the counter market OCM

Istanbul Stock Exchange
The Istanbul Stock Exchange was established on December 26, 1985 for the
purpose of ensuring that securities are traded in a secure and stable
environment, and commenced to operate on January 3, 1986. The ISE has
contributed to the development of Turkish capital markets and Turkish
economy since the date of its establishment.
Established as per the Governmental Decree in Force of Law (KHK) No.91,
the ISE is a public corporation operating as an autonomous and
professional institution. The ISE is entitled to issue legal regulations
related to the subjects and fields within the scope of its authority.
The General Assembly comprising of the ISE Members is the supreme
decision making body. The Executive Council of the ISE comprises of the
Chairman and four members. While the Chairman is appointed as per a
tripartite decree, members of the Executive Council and auditors are
elected by the General Assembly of ISE.
Hüseyin ERKAN was appointed Chairman&CEO of the ISE on November 2,
2007.

Turkish Derivatives Exchange
TURKDEX, started its operation right after the company was
registered in Registry of Commerce. This registration was
officially announced through the Gazetta of Registry of
Commerce, dated July 4, 2001.
Futures and options exchanges are one of the main institutions of
liberal economic systems. Although negative developments hurt
the financial markets in recent years, trading volumes of futures
exchanges have continued to increase during that period. 2007
figures indicate that trading volume of futures exchanges has
exceeded USD 2.2 quadrillions and approximately 15 billions
contracts have been traded.

Turkish Derivatives Exchange
In a free market economy prices are determined by supply and
demand. In Turkey, privatization has been gradually increasing
and the governments implement policies to provide such a free
market. In addition to that free capital flows between countries
are encouraged and the restrictions on this are being abolished
in relevance with new legislations enacted. As a result of such
developments in terms of a free market economy almost every
company in the country is becoming more sensitive to global
economic fluctuations. Therefore the need for risk management
tools is obvious and with this intention Turkdex is offering
significant opportunities and instruments to those who need to
manage such risks.

Over the Counter Market
Within the derivatives markets, many products are traded through
exchanges. An exchange has the benefit of facilitating liquidity and
also mitigates all credit risk concerning the default of a member of the
exchange. Products traded on the exchange must be well
standardised to transparent trading. Non-standard products are
traded in the so-called over-the-counter (OTC) derivatives markets.
OTC derivatives have less standard structure and are traded
bilaterally (between two parties). In such bilateral contract, each party
should have credit risk concerns with respect to the other party. OTC
derivatives are significant in the asset classes such as interest rate,
foreign exchange, equities and commodities.
Over-the-counter (OTC) or off-exchange trading is to trade financial
instruments such as stocks, bonds, commodities or derivatives
directly between two parties. It is contrasted with exchange, which
occurs via facilities constructed for the purpose of trading (i.e.,
exchanges), such as futures exchanges or stock exchanges.
(Source: http://en.wikipedia.org/wiki/Over-The-Counter_Market)

The Income Statement
Financial performance is assessed by giving a summary
of how the business incurs its revenues and
expenses through both operating and non-operating
activities. It also shows the net profit or loss incurred
over a specific accounting period, typically over a fiscal
quarter or year.
The income statement is divided into two parts: the
operating and non-operating sections.

Analysis of Financial Statements
Companies should deliver annual reports to
their stockholders.These reports are
divided into two part:
• First part: Verbal presentation
• Second part: Financial statements (The
income statement, the balance sheet, the
statement of retained earnings and the
statement of cash flows)

• Operating section: Operating items are interesting to
investors and analysts alike because this section discloses
information about revenues and expenses that are a direct
result of the regular business operations. For example, if a
business creates sports equipment, then the operating
items section would talk about the revenues and expenses
involved with the production of sports equipment.
Non-Operating section: The non-operating items section
discloses revenue and expense information about activities
that are not tied directly to a company's regular operations.
For example, if the sport equipment company
sold a factory and some old plant equipment, then this
information would be in the non-operating items section.
• (Resource: www.investopedia.com/terms/i/incomestatement.asp, Quoted: 08.08.2011)

• Net sales are shown at the top of each statement, after
which various costs, including income taxes, are
subtracted to obtain the net income avaible to common
stock holders. A report on earnings per share (EPS) is
given at the bottom of the statement which is the most
important item in the statement.
• EPS= Net income/Common shares outstanding
• Dividends per share = Dividends paid to common
stockholders/Common shares outstanding

The Balance Sheet
A financial statement that summarizes a company's
assets, liabilities and shareholders' equity at a specific
point in time. These three balance sheet segments give
investors an idea as to what the company owns
and owes, as well as the amount invested by the
shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders’ Equity
Balance sheet
Source:www.investopedia.com/terms/b/balancesheet.asp#ixzz1Ug1wVtMZ

The Balance Sheet
• The assets are listed in order of their liquidity, or the
length of time it typically takes to convert them to cash.
• The claims are listed in the order in which they must be
paid: Accounts payable must generally be paid with in 30
days, notes are payable within 90 days, and so on, down
to the stockholders’ equity accounts, which represent
ownership and need be paid off.
Source: Essentials of Managerial Finance, J. Fred Weston and Eugene
Brigham, 1992, Harcourt Brace&Company International Edition, pp.35.

Statement of Cash Flows
Cash flows are more important than net income, because
dividends must be paid in cash and because cash is necessary
to purchase the assets required to continue operations.
Statement of cash flows is designed to show how the firm’s
operations have effected its cash position and to help answer
questions such as these:
• Is the firm generating the cash needed to purchase additional
fixed assets for growth?
• Is growth so rapid that external financing is required both to
maintain operations and for investment in new fixed assets?
• Does the firm have excess cash flows that can be used to
repay debt or to invest in new products?
• Source: Essentials of Managerial Finance, J. Fred Weston and Eugene Brigham, 1992,
Harcourt Brace&Company International Edition, pp.43.

Türk Demir Döküm Fabrikaları
Anonim Şirketi
• Our example company is a Turkish company and name
is Türk Demir Döküm Fabrikaları Anonim Şirketi. Lt. The
Company is engaged in the manufacture and trade of
durable consumer goods such as iron panel and steel
radiators, cast iron radiators, instant and storage water
heaters, central heating systems, iron stoves, individual
heating equipment.
• The average number of employees is 1.562 out of which
221 white collared and 1.341 blue collared
• Türk Demir Döküm

Financial Analysis
People go to doctor for two reasons: First is being cured,
second is control before the illness. It is also same for
the companies.
Who will interested in this analysis?
(Potential) shareholders, managers but for what?
Financial analysis is started with ratio analysis. Ratios are
designed to show relationship between financial
statement accounts. So, we need balance sheet, income
statement and statement of retained earnings at least
two consecutive years.

Ratio Analysis
Taking some factors into consider ratio analysis:
• The ratios should be compared with industry
average or past results of the company
• Be aware of economic conditions between
years which are chosen as periods
• Not use just one ratio to make common about
the company
• Do not divide unrelated numbers to calculate a
ratio

Ratio AnalysisSource: Boone Louis E. And David L. Kurtz, 2011, Contemporary Business, John Wiley&Sons Pte Ltd., ISBN: 978-0-470-873762, pp.517.
Category Ratio Description
Liquidity ratios Current ratio Current assets divided by current liabilities
Quick (acid test) ratio Current assets (minus inventory) divided
by current liabilities
Efficiency ratios (Asset
management ratios)
Inventory turnover Cost of goods sold (or sales) divided by
average inventory
Receivables turnover Credit sales divided by average accounts
receivable
Total asset turnover Revenue or sales divided by average total
assets
Leverage ratios Debt ratio Total liabilities divided by total assets
Long term dept to equity Long-term debt divided by owners’ equity
Profitability ratios Gross profit margin Gross profit divided by revenue or sales
Net profit margin Net profit divided by revenue or sales
Return on equity Net profit divided by average owners’
equity

Ratio Analysis
Market Value Ratios should be added list of ratios.
These are:
Price / Earning (P/E) Ratio = Price per share / Earnings per
share
Market / Book Ratio = Common equity / Shares outstanding

Liquidity Ratios
Current ratio = Current assets/Current liabilities
= 399.462.670 / 315.931.014
= 1.26 times (2005) and 2004 = 1.49 times
Quick ratio = Current assets – Inventories / Current
liabilities
= 399.462.670- 91.808.536 /
315.931.014
= 0.97 times (2005) and 2004 = 1.09 times

Efficiency ratios
Inventory turnover = Cost of goods sold / Inventories
= 189.641.615 / 91.808.536
= 2.06 (2005) and 1.98 (2004)
Receivables turnover = (Credit) sales / Average Accounts
Receivables
= 261.588.631 / 265.918.406
= 0.98 (2005) and 1.10 (2004)
Total asset turnover = Sales / (Average) total assets
= 261.588.631 / 489.834.716
= 0.53 (2005) and 0.57 (2004)

Leverage Ratios
Debt ratio = Total liabilities / Total assets
= 342.964.466 / 489.834.716
= 0.70 (2005) and 0.61 (2004)
Long term debt to equity = Long-term debt / owners’ equity
= 24.302.307 / 146.870.250
= 0.16 (2005) and 0.24 (2004)

Profitability Ratios
Gross profit margin = Gross profit / Sales
= 71.947.016 / 261.588.631
= 0.27 (2005) and 0.27 (2004)
Net profit margin = Net income / Sales
= 10.929.320 / 261.588.631
= 0.04 (2005) and 0.04 (2004)
Return on equity = Net profit / Average owners’ equity
= 10.929.320 / 45.000.000
= 0.24 (2005) and 0.22 (2004)

Market Value Ratios
Price / Earning (P/E) Ratio = Price per share / Earnings
per share
= 5.80 / 0.24
= 24.16 (2005)
Earnings per share = Net profit / Number of shares
= 10.929.320 / 45.000.000
= 0.24

Market Value Ratios
Market / Book Ratio = Market price per share /
Book value per share
= 5.80 / 1
= 5.80
Book value per share = Common equity (share
capital)/Shares outstanding
=45.000.000 / 45.000.000
= 1

Risk And Rates Of Return
Defining and measuring risk
• Expected Rate of Return
• Measuring Risk: The Standard
Deviation
• Measuring Risk: Coefficient of
Variation

Strategic Long-Term Investment
Decisions
Generating ideas for capital projects
• Who creates the capital budgeting projects?
• Do we need to be an entrepreneur?
• Two questions for testing being entrepreneur
(CV and address book)

Decisions
Project classifications
1. Replacement: Maintenance of business
2. Replacement: Cost reduction
3. Expansion of existing products or markets
4. Expansion into new products or markets
5. Safety and/or environmental projects
6. Other

Decisions
Similarities between capital budgeting
evaluation techniques
1. Project cost
2. Expected cash flows estimation
3. Estimation of project riskiness
4. Cost of capital decision
5. Measurement of present value of cash inflows
6. Present value of the expected cash inflows
and required outlay

Capital Budgeting Evaluation
Techniques
Payback period
Project S :
Net Cash Flow
Cumulative NCF

Techniques
Payback period
Project L :
Net Cash Flow
Cumulative NCF

Techniques
Net Present Value (NPV)
n
n
k
CF
k
CF
k
CF
CFNPV
)1(
..............
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0
+
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∑= +
=
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Techniques
Internal rate of return (IRR)
0
)1(
..............
)1()1( 2
2
1
1
0 =
+
++
+
+
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+ n
n
IRR
CF
IRR
CF
IRR
CF
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0
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IRR
CF

Net Present Value (NPV)
Year 0 1 2 3 4 5 6 7 8 9
Revenue 0 55.668 87.101 87.101 87.101 87.101 87.101 87.101 87.101 87.101
Costs 0 -50.259 -53.414 -53.414 -53.414 -53.414 -53.414 -53.414 -53.414 -53.414
Rent for the
land from
the 4th year -1.560 -1.560 -1.560 -1.560 -1.560 -1.560
Investment -61.698 -23.009
CF (US$)
-
61.698 5.409
33.68
7
33.68
7
32.12
7 9.118
32.12
7
32.12
7
32.12
7
32.12
7
PV -61.698 4.829 26.855 23.977 20.417 5.174 16.276 14.532 12.975 11.585
NPV 12,00% $35.830
IRR 29%
PBP -61.698 -56.869 -30.015 -6.037 14.380 19.553 35.830 50.362 63.337

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