Session 11

 04-02-2026

Today's session focused on understanding Free Cash Flow to Firm (FCFF) and working capital management as tools for evaluating a firm's financial performance and investment potential. We studied how FCFF is calculated using operating profit adjusted for taxes, depreciation, capital expenditure, and changes in working capital. The discussion emphasized that while accounting profits are important, actual cash flows provide a more accurate representation of a company's financial strength.

From my learning perspective, this session helped me bridge the gap between accounting figures and financial analysis. I understood that a company may appear profitable on paper but still face liquidity issues if its cash flows are poorly managed. The concept of working capital, calculated as assets - current liabilities, also highlighted the importance of short-term financial management in ensuring operational continuity. What stood out to me was how these concepts are widely used in valuation models and investment analysis. I now look at financial performance with a greater emphasis on cash generation rather than purely accounting profitability.

Comments

Post a Comment

Popular posts from this blog

Session 13

  10-02-2026 The focus of todays session was the relationship between risk and return, particularly through the classification of systematic and unsystematic risk. We also discussed how actual returns consist of both expected and unexpected components, with the unexpected portion representing the uncertainty investors face. The concept of diversification was introduced as a method for reducing company-specific risks. From my perspective, this session clarified an important principle in financial economics: not all risks are rewarded with higher returns. Systematic risk, which affects the entire market, cannot be eliminated through diversification and therefore plays a central role in determining expected returns. In contrast, unsystematic risk can be minimized by holding a diversified portfolio. This realization shifted my perspective on investment strategy. Instead of focusing on individual stocks, I now see the importance of portfolio construction and asset allocation as key to...
Read more

Session 16

24-02-2026 The discussion on Weighted Average Cost of Capital (WACC) helped me understand how companies evaluate the true cost of financing their operations. Earlier, I saw WACC mainly as a formula, but working through the problem made me realize that it actually reflects a firm’s capital structure and overall risk profile. We were given inputs like the market value of debt and equity, cost of debt, beta, tax rate, market risk premium, and risk-free rate. Calculating the cost of equity using the CAPM formula , helped me clearly see how systematic risk (beta) influences the return expected by shareholders. Another important step was adjusting the cost of debt by multiplying it with (1 – tax rate). This highlighted the tax shield benefit, showing how interest payments reduce taxable income and lower the effective cost of borrowing. Assigning weights based on market values of debt and equity made the calculation more meaningful. It showed how each source of finance contributes proportiona...
Read more

Session 15

  23-02-2026 This session introduced the Capital Asset Pricing Model (CAPM) and its role in explaining the relationship between risk and expected return. CAPM demonstrates that the return investors demand from an investment depends on the risk-free rate, the market risk premium, and the asset’s beta. The class also covered the concept of cost of debt, which represents the effective interest rate a firm pays on borrowed capital. This discussion helped me understand how financial theory provides structured frameworks for evaluating investment opportunities and financing decisions. CAPM illustrates that investors require compensation both for the time value of money and for the systematic risk they assume. At the same time, the concept of cost of debt highlighted how firms strategically balance different sources of financing. Since interest payments are tax-deductible, debt financing can reduce the effective cost of capital, influencing a firm’s capital structure decisions. I now se...
Read more