Finance for Managers

17 Pages Posted: 13 Jun 2019

Date Written: May 29, 2019


The first section (from accounting to corporate finance) answers the following questions: What is the net income? Is it what the shareholders “earn”, what the company “earns”, what someone “earns”? What does shareholders´ equity mean? Is it money? We show that net income is an arbitrary number which depends on several decisions on the accounting of expenses and revenues. We use three different definitions of cash flow: equity cash flow (ECF), free cash flow (FCF) and capital cash flow (CCF) and answer to the question: When is net income equal to the equity cash flow?

The second section (shareholder value creation and shareholders return) defines, analyzes and calculates shareholder value creation. It also differentiates the expected return from the required return. The all-shareholder return is the return that all the shareholders of a company had in a period. It is equal to the hypothetical return of a unique shareholder of the company. It is also the return of a shareholder that always had a constant proportion of the shares. The all-period shareholder return is the return that a shareholder that maintained the shares for the whole period had. There are many all-period shareholder returns, depending on the actions of the shareholder during the period: fraction of dividends reinvested, fraction of shares sold when the company repurchased them, number of shares subscribed when the company increased capital… Most databases provide a specific all-period shareholder return valid for a shareholder that reinvested 100% of the dividends, did not sell any share in repurchases and did not subscribe any new share when the company increased capital. In many situations, there are substantial differences among these returns.

The third section (topics and real cases on valuation) shows that It is a big mistake to use betas calculated from historical data to compute the required return to equity for seven reasons. It also shows two real valuation cases of companies.

The fourth section (other finance and investing topics) shows that the Market Portfolio is NOT efficient and that it has been very easy to beat the S&P500 in 2000-2018. It also shows confusions, errors and inconsistencies of several utilities regulators when calculating WACC using CAPM.

Keywords: Value, Price, Free cash flow, Equity cash flow, Capital cash flow, Book value, Market value, PER, Goodwill, Required return to equity, Working capital requirements

JEL Classification: G12, G31, M21

Suggested Citation

Fernandez, Pablo, Finance for Managers (May 29, 2019). Available at SSRN: or

Pablo Fernandez (Contact Author)

IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
+34 91 357 0809 (Phone)
+34 91 357 2913 (Fax)


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