CORPORATE FINANCE

 Course Name : FINANCE 300

 Credit :3
 Program : Advanced Program

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 Lecturer’s Information

 Full name: Phan, Hong Mai

 Tittle: PhD
 Address: Room 921 –Building A1
 Email: [email protected]
 Institute: School of Banking and Finance
 National Economics University

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 Course Schedule

Session Chapter Number of period

Theory Homework, Practice
1 Chapter 1 3 0
2&3 Chapter 2 5 1
4&5 Chapter 3 4 2
6 1st Exam 3
7&8 Chapter 5 & 6 4 2
9 & 10 Chapter 7 & 8 4 2
11 & 12 Chapter 9 4 2
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 Course Schedule

Session Chapter Number of period

Theory Homework,
Practice
13 Chapter 14 2 1
14 2nd Exam 3
15 Review 3 0
Total 35 10
Grading policy: Total point
= 10%.Participation + 20%.1stexam + 20%.2ndexam + 50%.Final exam
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Required Textbook

Ross et al. (2013), Fundamentals of Corporate Finance,

The 10th Edition, The McGraw-Hill/Irwin.
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 Chapter 1

Introduction

 PhD, Phan Hong Mai

 School of Banking and Finance
 National Economics University
 [email protected]
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Chapter Outline

1.1 Definition of Corporate Finance

and Financial Management Decisions
1.2 Forms of Business Organization
1.3 Goal of Financial Management
1.4 Agency problem
1.5 Financial market & the Corporation

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1.1.1 Definition of Corporate Finance

 What long-term investments should you take

on? (what lines of business will you be in and
what sorts of buildings, machinery, and
equipment will you need?)
 Where will you get the long-term financing to
pay for your investment? (Will you bring in
other owners or will you borrow the money?)
 How will you manage your everyday financial
activities such as collecting from customers
and paying suppliers?

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 1.1.1 Definition of Corporate Finance

Corporate finance is the study of ways

to answer these three questions

Long-term Long-term
Investments Financing

Everyday financial activities

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 1.1.2 Financial Management Decisions

The financial manager must be concerned

with three basic issues related to these above
questions of Finance concept:
 Capital Budgeting Long-term investment

 Capital Structure Long-term financing

 Working Capital Everyday financial

Management activities
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1.1.2 Financial Management Decisions

 Capital Budgeting: The process of planning

and managing a firm’s long-term investments.
 Capital Structure: The specific mixture
of long-term debt and equity that the firm
uses to finance its operations.
 Working Capital Management: Everyday
activities to manage a firm’s short-term
assets and liabilities.

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1.1.2.1 Capital Budgeting

 The financial manager tries to identify

investment opportunities that are worth more
to the firm than they cost to acquire.
 The value of the cash flow generated by an
asset exceeds the cost of that asset.

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1.1.2.1 Capital budgeting

 Financial managers must be concerned not

only with how much cash they expect to
receive, but also with when they expect to
receive it and how likely they are to receive it.
 Evaluating the size, timing, and risk of
future cash flows is the essence of capital
budgeting.

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1.1.2.2 Capital Structure

 The way in which the firm obtains and manages

the long-term financing needed to support its
long-term investments.

(1) What is mixture of debt and equity best?

(2) What are the least expensive sources of
funds for the firm?
-> The mixture chosen will affect both the risk
and the value of the firm.

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 1.1.2.3 Working Capital Management

 Managing the firm’s working capital is a day-to-

day activity that ensures that the firm has
sufficient resources to continue its operations and
avoid costly interruptions.
 How much cash and inventory should we keep
on hand? Should we sell on credit? If so, what
terms will we offer, and to whom will we extend
them? How will we obtain any needed short-
term financing? Will we purchase on credit,
or will we borrow in the short term and pay cash?
If we borrow in the short term, how and
where should we do it? 1-15
1.2 Forms of Business Organization

Three major forms in the United States:

 Sole Proprietorship: a business owned by a
single individual.
 Partnership: a business formed by two or
more individuals or entities (general partners
and limited partners).
 Corporation: a business created as a
distinct legal entity composed of one or more
individuals or entities.

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 1.2.1 Sole Proprietorships

 Advantages
 Easiest to start Can open or close quickly, easily
 Least regulated

 Single owner keeps all the profits

Doesn’t need to share earnings with anyone
 Taxed once as personal income

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 1.2.1 Sole Proprietorships

 Disadvantages
 Limited life Depend on the life and wealth of owner
 Limited equity -> unable to exploit new opportunities
because of insufficient capital

 Unlimited liability
Because of keeping all profit
for business debt
 Difficult to transfer ownership
Requires the sale of entire business to new owner

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 1.2.2 Partnerships

 Advantages
 Easy and inexpensive to start
 All partners share in gains The same as a
Sole proprietorship
 Taxed once as personal income

 More capital available Because of owning by two or

more partners

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 1.2.2 Partnerships

 Disadvantages Partnership dissolves when one partner

 Limited life wishes to sell out or dies
 Limited equity Amount of capital limited to
partners’ combine wealth
 Unlimited liability for partnership debts
 Difficult to transfer ownership
Requires that a new partnership be formed

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 1.2.3 Corporation

 Advantages
 Transfer of ownership is easy
Ownership is represented by shares of stock
 Unlimited life
 Easier to raise capital
Corporation borrows money in its own name
It can also issue bonds or stocks

 Limited liability for corporation debts

The most the owners can lose is what they have invested
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1.2.3 Corporation

 Disadvantages
 Cost of set-up and report filing
Starting corporation is more complicate and
costly than starting the other forms
 Double taxation
Because of being a legal person, corporation
must pay corporation income tax. Moreover,
money paid out to stockholders in the form
of dividends is taxed again as personal
income taxes.
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 1.3 Goal of Financial Management

 Possible and popular goals:

 Maximize profits Not
 Maximize sales and market share Ways of possible
Earning
 Minimize costs Profits
to
maximize
 Develop the trademark both
 Avoid financial distress profit
 Maintain stability Ways of and
Controlling risk safety
 Operate safety
What’s a good financial management decision
for the owners? 1-23
1.3 Goal of Financial Management

 Owners want to maximize the value of their

assets = Stockholders buy stock to seek the
gain. So the task of financial manager is to
increase the value of stock.
 The goal of financial management is to
maximize the current value per share of
existing stock.
 If the stockholders are winning in the sense
that the leftover, residual portion is growing =
everyone else is winning also.
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1.3 Goal of Financial Management

 Good decisions increase the value of stock.

 Bad decisions decrease the value of stock.
-> Corporate Finance is the study of the
relationship between business decisions and
the value of the stock.

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1.4 Agency problem

 Agency problem is the conflict between the

principal (owner) and the agent (manager).
 Managers and Stockholders usually differ in
risk attitude and interest obtained from
business.
 Managers are naturally inclined to act in their
own objects as sales maximization, career
development… which are not always the
same as the best aim of stockholders (value
of stock).
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1.4 Agency problem

 Agency problems makes agency costs - the

costs of the conflict of interest between
stockholders and management.
 Two types of direct agency costs: (1) a
corporate expenditure that benefits management
but costs the stockholders, (2) an expense that
arises from the need to monitor management
actions.
 Indirect agency costs are lost opportunities
because of the conflict of risk attitude and
interest between stockholders and management.
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1.5 Financial Markets & the Corporation

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1.5 Financial Markets & the Corporation
 Cash comes into the firm from the sale of debt
(bonds) and equity (stocks).
 The money is used to purchase assets.
 Those assets generate cash that is used to
 Pay interest to stakeholders
 Reinvest in additional assets
 Repay interest to creditors and dividends to
stockholders
-> Financial market bring buyers (investors) and
sellers (firms) together. Firms can raise capital and
investors can make money from financial market
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1.5 Financial Markets & the Corporation

 Primary markets are those in which the

securities of corporations are issued.
 The transaction in the primary market raises
money for the corporation.

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1.5 Financial Markets & the Corporation

 Secondary markets are those in which these

securities are bought and sold after the original
sale.
 The secondary markets provide the mean of
transferring ownership of corporate securities.

 The secondary markets still critical to corporations

because of the willing of investors to purchase
securities which can be resold easily.

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 Summary and Conclusions

 Corporate finance has three main areas of concern:

Capital budgeting, Capital structure and Working
capital management.
 The goal of financial management is to increase
the market value of the owner’s assets (or stocks).
 The corporate form is superior to the sole
proprietorship and partnership when it comes to
raising money and transferring ownership interest,
but it has disadvantage of double tax.
 There is conflict between stockholders and
manager (agency problem) but finally, managers
tend to act in stockholder’s interest. 1-32
HOMEWORKS

 Concepts Review: 1, 2, 3, 6, 7.

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