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Transcript

  • 1. Introduction to Corporate Finance
  • 2. Key Concepts and Skills
    • Know the basic types of financial management decisions and the role of the Financial Manager
    • Know the financial implications of the various forms of business organization
    • Know the goal of financial management
    • Understand the conflicts of interest that can arise between owners and managers
    • Understand the various types of financial markets
  • 3. Chapter Outline
    • 1.1 What is Corporate Finance?
    • 1.2 The Corporate Firm
    • 1.3 The Goal of Financial Management
    • 1.4 The Agency Problem and Control of the Corporation
    • 1.5 Financial Markets
  • 4. 1.1 What is Corporate Finance?
    • Corporate Finance addresses the following three questions:
      • What long-term investments should the firm choose?
      • How should the firm raise funds for the selected investments?
      • How should short-term assets be managed and financed?
  • 5. Balance Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible
      • Total Value of Assets:
    Shareholders’ Equity Current Liabilities Long-Term Debt
      • Total Firm Value to Investors:
  • 6. The Capital Budgeting Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt
      • What long-term investments should the firm choose?
  • 7. The Capital Structure Decision How should the firm raise funds for the selected investments? Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt
  • 8. Short-Term Asset Management
      • How should short-term assets be managed and financed?
    Net Working Capital Shareholders’ Equity Current Liabilities Long-Term Debt Current Assets Fixed Assets 1 Tangible 2 Intangible
  • 9. Capital Structure The value of the firm can be thought of as a pie. The goal of the manager is to increase the size of the pie. The Capital Structure decision can be viewed as how best to slice the pie. If how you slice the pie affects the size of the pie, then the capital structure decision matters . 50% Debt 50% Equity 25% Debt 75% Equity 70% Debt 30% Equity
  • 10. The Financial Manager
    • The Financial Manager’s primary goal is to increase the value of the firm by:
    • Selecting value creating projects
    • Making smart financing decisions
  • 11. Hypothetical Organization Chart Chairman of the Board and Chief Executive Officer (CEO) President and Chief Operating Officer (COO) Vice President and Chief Financial Officer (CFO) Treasurer Controller Cash Manager Capital Expenditures Credit Manager Financial Planning Tax Manager Financial Accounting Cost Accounting Data Processing Board of Directors
  • 12. The Firm and the Financial Markets Cash flow from firm (C) Taxes (D) Retained cash flows (F) Invests in assets (B) Dividends and debt payments (E) Current assets Fixed assets Short-term debt Long-term debt Equity shares Ultimately, the firm must be a cash generating activity. The cash flows from the firm must exceed the cash flows from the financial markets . Firm issues securities (A) Government Invests in assets Current assets Fixed assets Firm Short-term debt Long-term debt Equity shares Financial markets
  • 13.
    • Identification of Cash Flows
  • 14.  
  • 15.  
  • 16.  
  • 17.  
  • 18. Forms of Business Organization
    • The Sole Proprietorship
    • The Partnership
    • The Corporation
  • 19. 1.3 The Goal of Financial Management
    • What is the correct goal?
      • Maximize profit?
      • Minimize costs?
      • Maximize market share?
      • Maximize shareholder wealth?
  • 20. The goal of financial management is to
    • Maximize the current value per share of the existing stock .
    • Maximize the market value of the existing owners’ equity . (A more general goal)
  • 21. The most important job of a financial manager:
    • To create value from the firm’s capital budgeting , financing , and net working-capital activities.
  • 22. Corporate Finance
    • The study of the relationship between business decisions and the value of the stock in the business.
  • 23. 1.4 The Agency Problem
    • Agency relationship
      • Principal hires an agent to represent his/her interest
      • Stockholders (principals) hire managers (agents) to run the company
    • Agency problem
      • Conflict of interest between principal and agent
  • 24. Managerial Goals
    • Managerial goals may be different from shareholder goals
      • Expensive perquisites
      • Survival
      • Independence
    • Increased growth and size are not necessarily equivalent to increased shareholder wealth
  • 25. Managing Managers
    • Managerial compensation
      • Incentives can be used to align management and stockholder interests
      • The incentives need to be structured carefully to make sure that they achieve their intended goal
    • Corporate control
      • The threat of a takeover may result in better management
    • Other stakeholders
  • 26. 1.5 Financial Markets
    • Primary Market
      • Issuance of a security for the first time
    • Secondary Markets
      • Buying and selling of previously issued securities
      • Securities may be traded in either a dealer or auction market
        • NYSE
        • NASDAQ
  • 27. Financial Markets Firms Investors Sue Bob Secondary Market money securities Stocks and Bonds Money Primary Market