Part1IntroCF.pptx

Introduction To Corporate FinanceWhy take this course?Lecture OutlineFinancial Management DecisionsForms of Business OrganizationThe Goal of Financial ManagementThe Agency Problem and Control of the CorporationFinancial Markets and the CorporationFinancial Management DecisionsWorking capital managementHow do we manage the day-to-day finances of the firm?Daily net cash positionCapital budgeting(Investment decision)What long-term investments or projects should the business take on?Capital structure(Financing decision)How should we pay for our assets?Should we use debt or equity?Financial Management Decisions(1)Cash raised from investors(Financing or capital structure decision)(2)Cash invested in firm(Investment decision,or capital budgeting decision)(3)Cash generated by operations(4a)Cash reinvested(4b)Cash returned to investors(Dividend and payout decisions)What is a Corporation?Corporate finance perspectiveA firm is a collection of projects.A project is anything that generates cash flowsLegal perspective:Business FormsSole proprietorshipPartnershipGeneral PartnersLimited Liability PartnershipsLimited Liability CompanyCorporationFour Types of FirmsSole ProprietorshipAdvantagesEasiest to startLeast regulatedSingle owner keeps all the profitsTaxed once as personal incomeDisadvantagesLimited to life of ownerEquity capital limited to owners personal wealthUnlimited liabilityDifficult to sell ownership interestPartnershipAdvantagesTwo or more ownersMore capital availableRelatively easy to startIncome taxed once as personal incomeDisadvantagesUnlimited liabilityGeneral partnershipLimited partnershipDifficult to raise capitalLimited life-Partnership dissolves when one(general)partner dies or wishes to sellDifficult to transfer ownershipCorporationAdvantagesLimited liabilityUnlimited lifeSeparation of ownership and managementEasy transfer of ownershipEasier to raise capitalDisadvantagesSeparation of ownership and managementDouble taxation(in the USA)Cost of set-up and report filingAnatomy of a CorporationGoal Of Financial ManagementWhat should be the goal of a corporation?Maximize profit?Minimize costs?Maximize market share?Maximize the current value of the companys stock?Goal Of Financial ManagementThe primary financial goal is shareholder wealth maximization,which translates to maximizing stock price.Is stock price maximization the same as profit maximization?No,despite a generally high correlation amongst stock price,EPS,and cash flow.Current stock price relies upon current earnings,as well as future earnings and cash flow.Some actions may cause an increase in earnings,yet cause the stock price to decrease(and vice versa).Factors that affect stock priceProjected cash flows to shareholdersTiming of the cash flow streamRiskiness of the cash flowsQuick QuizWhat are the three types of financial management decisions and what questions are they designed to answer?What are the three major forms of business organization?What is the goal of financial management?The Agency ProblemAgency relationshipPrincipal hires an agent to represent their interestStockholders/Creditors(principals)hire managers(agents)to run the companyAgency Problem due to Conflict of interestsAgency ProblemWithin a corporation,agency problems exist between:Shareholders and ManagersShareholders and Creditors(bondholders)Shareholders versus ManagersManagers are naturally inclined to act in their own best interests.But the following factors affect managerial behavior:Managerial compensation plansDirect intervention by shareholdersThe threat of firingThe threat of takeoverShareholders versus CreditorsShareholders(through managers)could take actions to maximize stock price that are detrimental to creditors.New Investment OpportunitiesDividend versus Retained EarningsIn the long run,such actions will raise the cost of debt and ultimately lower stock price.What is a Financial Market?A market is a venue where goods and services are exchanged.A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds.Cash flows to the firmPrimary vs.Secondary MarketsQuick QuizWhat are agency problems and why do they exist within a corporation?What is the difference between a primary market and a secondary market?End of Lesson