Finance Finance Finance Finance

1. Ch 1. Introduction to Corporate
Finance

2. 1. Corporate Finance
• Def: Corporate Finance (Financial Management) is an area
dealing with Capital budgeting, Capital structure and working
capital Management.
• Capital budgeting is the process of planning and managing a
firm’s long term investments.
• Capital structure is the mixture of debt and equity maintained by
a firm
• Working capital management is about managing short term
assets and liabilities.
Tài chính doanh nghiệp là một phân môn của ngành Tài chính, nghiên cứu về quá
trình hình thành và sử dụng các của cải trong doanh nghiệp nhằm mục tiêu tối đa
hóa lợi ích chủ sở hữu. Mục đích tối đa hóa lợi ích chủ sở hữu là cơ sở quan
trọng của lý thuyết tài chính doanh nghiệp hiện đại.

3. What is meant by corporate finance?
Corporate finance is concerned with how businesses fund their
operations in order to maximize profits and minimize costs. It
deals with the day-to-day operations of a business' cash flows
as well as with long-term financing goals (e.g., issuing bonds).

4. Who is a Finance Manager

5. 2. Forms of Business Organization
1) sole proprietorship:
• A business is owned by a single owner. Income is taxed as
personal income.
• Advantage:
• - easy and inexpensive to set up
• - owner keeps all profits
• Disadvantage:
• - unlimited liability
• - limited to life of owner
• - limited capability of raising capitals

6. 2) Partnership
• A business is formed by two or more individuals.
Income is taxed as personal income to partners.
• Advantage:
• - easy and inexpensive to set up
• Disadvantage:
• - unlimited liability
• - limited life until the partnership is maintained
• - limited in transferring ownership
• - limited to raise capitals

7. 3) Corporation: a business created as a distinct
legal entity composed of one or more
individuals and entities. Ownership is separated
from management.
• Advantage:
• - easy to raise capital
• - easy to transfer ownership
• - limited liability
• - unlimited life

8. • Disadvantage:
• - expensive and not easy to set up
• - double taxation: taxes on corporate and shareholders
4) Limited Liability Company (LLC)
• A hybrid of partnership and corporation
• Taxed like partnership but rating limited liability for
owners.
5) Another name of corporation: joint stock companies,
public limited companies, limited liability companies,

9. 3. Primary Objective of Corporation
• Stock holders elect directors who then hire managers
to run a corporation. Directors and managers are
called “insiders.”
• Goal of management is to maximize the fundamental
or intrinsic price of common stock (shareholder
wealth) rather than the market price. Intrinsic price
reflects all relevant information about cash flows and
risk. But market price reflect only investors’ selection
and interpretation of information.
• Maximizing stock price also benefit social welfare: (1)
owners of stocks are society, (2) Consumer benefit
resulting from high quality and low cost, and (3)
more employee, etc

10. • However some non US firm (European) has board
of directors representing the interests of
employees or government, not juts only
shareholders.
• Benefit corporation (B corporation) which
expands fiduciary responsibilities including
interests other than shareholders. E.g.) Big Bad
Wolf (B Corp) mandates to help the environment
and society. The Big Bad Wolf, which sells
products for companion pets, seeks to purchase
merchandise from small, local, minority-owned
businesses even if their prices are a bit higher.

11. • Environmental, social, and governance (ESG) criteria
are a set of standards for a company’s behavior used by
socially conscious investors to screen potential
investments. Environmental criteria consider how a
company safeguards the environment, including
corporate policies addressing climate change, for
example. Social criteria examine how it manages
relationships with employees, suppliers, customers,
and the communities where it operates. Governance
deals with a company’s leadership, executive pay,
audits, internal controls, and shareholder rights.
• (https://www.investopedia.com/terms/e/environment
al-social-and-governance-esg-criteria.asp)

12. 5. Agency problem and control of
corporation
1) agency relationship: a relation in which one hires
others to represent one’s interest.
• E.g) stock holders and managers
2) agency problem: the possibility of conflict of interest
between the stock holders and management of the firm.
• E.g) a renovation project benefiting managers but
costing stockholders.
• E.g) a very risk project benefiting stockholders but
risking the position of the management.

13. 3) agency costs: cost of conflict on interest
between stockholders and managers.
Two types of agency costs:
(1) indirect cost: lost investment opportunities.
(2) direct cost:
• - corporate expenditure benefiting managers
but costing stockholders
• - an expense in order to monitor the
managers’ behavior.

14. 4) how to align interest of management with that of
share (stock) holders?
- Compensation basing on the performance
• (e,g) stock option to employee
• (e.g) salaries
- Control of the firm: manager replacement
• (e.g) proxy fight to step down managers
• (e.g) takeover leading to replace the existing
managers with new managers.

15. 5) Stakeholders: someone other than a
stockholder or creditor who potentially has a
claim on the cash flows of the firm. E.g)
employees, customers, suppliers, government.
These groups exert control over the firm.

16. 5. Financial markets and corporation
• Financial markets in which corporations can raise
capitals by selling equities or borrowing.
• Primary market: original sale of equity or debt by
corporations or government
• - public offering registering with SEC(Securities and
Exchange Commissio-uỷ ban chứng khoán và sàn giao
dịch Mỹ)
• - private offering not registering with SEC
• Secondary market: the market where securities are
bought and sold after the original sale. E.g) NYSE

18. • Dealer versus Auction Markets
- Dealer market (over-the-counter): dealers who
own securities are connected electronically.
- Auction market: it has physical location and
match those who wish to sell with those who
wish to buy.
• Trading in corporate securities: NYSE, AMEX, OTC,
NASDAQ
• Listing: stocks that trade on an organized
exchange are said to be listed on that exchange.
To be listed, firms must meet certain minimum
criteria concerning, for example, asset size,
number of shareholders, etc.