Introduction to Corporate

Finance
K. Stephen Haggard, Ph.D.
 A rose by any other name…

• Corporate Finance
• Financial Management
• Managerial Finance

These terms are used interchangeably. Sorry.

 Balance Sheet Model of the Firm
Balance Sheet Equation:
Assets = Liabilities + Owner’s Equity

Assets – things owned by the firm and expected

to produce future economic benefit
Liabilities – money owed to investors (debt)
Equity – an ownership stake, a residual claim
(stock) Leftover after all assets are
used to pay off liabilitites
 Corporate Finance: Answers 3
Questions
Financial managers seek to answer 3 questions:
1. What long-term assets should be purchased
by the firm? Capital Budgeting
the goal is to maximize shareholder wealth and we should buy assete that do so
2. How should we finance the assets to be
purchased (debt or equity)? Capital Structure
the mix of debt and equity to finance ***
3. How should we manage the short-term
operating cash flows of the firm? Working
Capital Management
short term in <1year; CA-CL. the most important because if the short term isnt
working then the long term will fail. running out of cash will lead to bankrupcy
 Financial Managers in the Organization
CFO highest ranking finance and
accounting position.
the B.O.D is elected by the
shareholders to work in their Treasurer: top finance person
interests. cash managment: working capital
*** main job is hire/compensate/ credit manager: working capital-
fire managers*** recievables
Chairman and CEO (they capital expedintures: capital
determine the vision and budgetig; they look at the ideas
comefrom the marketing side and make the decision
usually) arent always the same. Financial planning: capital
Presidetnt and COO (making strucutre decisons
things work) ususally are controller: top
together accounting.
cost accounting
manager: determines
how to allocate costs
especaiily fixed costs.
Fin. acct. manager:
prepares final accoutns
IS manager: it records financial data, positions evolved to be under CTO
 Limited versus Unlimited Liability
• If a firm’s equity investors are responsible for
all the debts of the firm, regardless of how
much, we say they have Unlimited Liability.
• In limited liability, the equity investors can
only lose up to the amount they have already
invested in the firm. They cannot lose more
than their initial investment.
 Unlimited Liability Example
Lawn-mowing business in Mississippi.
a Business Broker helps small business value thier business if they want to sell it and
transfer ownership.
Legal Forms for Firms
Form Limited Double Easy Perpetual Easy Easy to start?
Liability? Taxation? Ownership Succession? capital
Transfer? raising?
Sole No No No No No 1
Proprietor-
ship
Partnership No No No No No 2
Limited Yes No No No No 3
Liability
Company
Corporation Yes Yes Yes Yes Yes 4

1 = easy, 2 = sort of easy, 3 = sort of difficult, 4 = difficult

partnership
usually the duble taxtion is
agreement
more tha that of an LLC in
required thus
sole trader or partnership
added expense
What do we care about in finance?
needed to pay day-to-day expenses;
Cash Flows!
Why? Ever try buying your groceries with
accounts receivable? Paying your rent with net
net income is not cash because of depreciation and credit-sale, costs
income? that are accounts recievable.
Timing is important: (1) time value of money (2) difference in
timing between CA and CL
• Identification of cash flows
• Timing of cash flows
The Goal of Financial Management
Should it be to
• Beat competition/maximize sales and/or
market share?
• Minimize costs?
• Maximize profits?
• Maintain steady earnings growth?
• Maximize shareholder wealth?
The Goal of Financial Management
Should it be to
• Beat competition/maximize sales and/or
you can achieve high market share while
market share? driving yourself into illiquidity e.g. cutting
price to increase sales
• Minimize costs?
• Maximize profits?
• Maintain steady earnings growth?
• Maximize shareholder wealth?
The Goal of Financial Management
Should it be to
• Beat competition/maximize sales and/or
market share? may reduce quality, leading to fall in sales,
• Minimize costs? customer loyalty, reputation, brand. should
ony get rid of costs that dont bring value to
• Maximize profits? the customers.
• Maintain steady earnings growth?
• Maximize shareholder wealth?
The Goal of Financial Management
Should it be to
• Beat competition/maximize sales and/or
market share?
maybe a short run view, could cost long
• Minimize costs? term reputation

• Maximize profits?
• Maintain steady earnings growth?
• Maximize shareholder wealth?
The Goal of Financial Management
Should it be to
• Beat competition/maximize sales and/or
market share?
• Minimize costs?
steady may not be as good as irregular that
• Maximize profits? leads to higher growth in the long run

• Maintain steady earnings growth?

• Maximize shareholder wealth?
 The Goal of Financial Management
Should it be to
• Beat competition/maximize sales and/or
market share?
• Minimize costs?
• Maximize profits?
• Maintain steady earnings growth?
• Maximize shareholder wealth?
common shareholders have a residual claim, they get whats left over after paying
everyone ahead in the cliams. by making shareholders wealthy, everyone else must
have gotten paid (preffered shareholders, employess, fniacial institutions and
governemnts)
 Stakeholders versus Shareholders
• Shareholders have an interest in the firm because
it is their money at risk (residual claim).
• Stakeholders have an interest in what the firm
does, but do not have an equity stake in the firm.
– Employees
– Customers
– Suppliers
– Government
• Can we satisfy both groups at the same time?
there are many ways to maximise shareholder wealth: maximise market cap, share
price, etc..
 Regulation
Publicly-traded firms in the U.S. are regulated by
the Securities & Exchange Commission (SEC).
• Firms must disclose all pertinent information
financial staments may need to be audited
• Officers must declare financial statements fairly
represent condition of firm (Sarbox, 2002)
material non-
• Trading on inside information is illegal public infomration
that gives unfiar
going “dark” menas reverting advanage
baack to private limited company
Complying with regulation is costly for firms.