Topic 1 SLIDE Introduction to Corporate Finance

8/2/2019 Topic 1 SLIDE Introduction to Corporate Finance

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Instructor : Associate Professor

Leyla Muradkhanli

Corporate Finance


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Corporate Finance

Introduction to CorporateFinance

Instructor : Associate ProfessorLeyla Muradkhanli


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Introduction to Corporate

Finance

What is Corporate Finance?

Forms of business organization

Sole proprietorship

Partnership

Corporation

Financial Goals of the CorporationAgency relationships


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What is Corporate Finance?Corporate Finance addresses the

following three questions:

1. What long-term investments should the firm

engage in?

2. How can the firm raise the money for therequired investments?

3. How much short-term cash flow does acompany need to pay its bills?


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The 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:


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Firm

Current

Assets

Fixed Assets

1 Tangible

2 Intangible

Shareholders

Equity

Current

Liabilities

Long-Term

Debt

What long-

terminvestmentsshould thefirm engage

in?

The Capital Budgeting Decision


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Firm

How can the firmraise the money

for the required

investments?

The Capital Structure Decision

Current

Assets

Fixed Assets

1 Tangible

2 Intangible

Shareholders

Equity

Current

Liabilities

Long-Term

Debt


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Firm

How much short-term cash flowdoes a companyneed to pay itsbills?

The Net Working Capital Investment Decision

Net

Working

Capital

Shareholders

Equity

Current

Liabilities

Long-Term

Debt

Current

Assets

Fixed Assets

1 Tangible

2 Intangible


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Capital StructureThe 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 up a thepie.

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%

Debt30%

Equity


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Hypothetical Organization Chart

Chairman of the Board and

Chief Executive Officer (CEO)

Board of Directors

President and ChiefOperating Officer (COO)

Vice President andChief Financial Officer (CFO)

Treasurer Controller

Cash Manager

Capital Expenditures

Credit Manager

Financial Planning

Tax Manager

Financial Accounting

Cost Accounting

Data Processing


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The Financial Manager

To create value, the financial manager

should:

1. Try to make smart investment

decisions.2. Try to make smart financing

decisions.


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Responsibility of the Financial

Staff

Maximize stock value by:

Forecasting and planning

Investment and financing decisions

Coordination and control

Transactions in the financial markets

Managing risk


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Cash flowfrom firm (C)

The Firm and the Financial

Markets

Ta

xes

(D)

Firm

Government

Firm issues securities (A)

Retainedcash flows (F)

Investsin assets

(B)

Dividends anddebt payments (E)Current assetsFixed assets

Financial

markets

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.


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Sole proprietorship

Partnership

Corporation

What are some forms ofbusiness organization?


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Advantages: Ease of formation Subject to few regulations No corporate income taxes

Disadvantages: Limited life Unlimited liability Difficult to raise capital

Sole Proprietorship


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A partnership has roughly the sameadvantages and disadvantages as a sole

proprietorship.

Partnership


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Advantages: Unlimited life Easy transfer of ownership Limited liability

Ease of raising capital Disadvantages:

Double taxation Cost of set-up and report filing

Corporation


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The primary objective should beshareholder wealth maximization, whichtranslates to maximizing stock price.

Should firms behave ethically? YES! Do firms have any responsibilities to society at

large? YES! Shareholders are also members

of society.

What should managements primaryobjective be?


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Agency relationships An agency relationship exists whenever a

principal hires an agent to act on theirbehalf.

Within a corporation, agency relationshipsexist between:

Shareholders and managers

Shareholders and creditors


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Shareholders versus Managers Managers are naturally inclined to act in

their own best interests. But the following factors affect managerial

behavior:

Managerial compensation plans Direct intervention by shareholders

The threat of firing

The threat of takeover


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Shareholders versus Creditors

Shareholders (through managers) could

take actions to maximize stock price thatare detrimental to creditors.

In the long run, such actions will raise thecost of debt and ultimately lower stockprice.

Documents

Topic 1 SLIDE Introduction to Corporate Finance