Chap01 HO
Chap01 HO
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
1 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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By the end of this module you should be able to: By the end of this module you should be able to:
1. identify and explain the three major decisions in corporate
finance, 5. explain the role of financial markets, identify their
participants and distinguish between the different types of
2. briefly explain the differences between a sole financial markets,
proprietorship a partnership
proprietorship, partnership, and a company
company,
6. use the two-period perfect certainty model to analyse
3. describe what should be management's primary goal in a investment, financing and dividend decisions, and
profit-oriented business, 7. distinguish between: ‘book value’ versus ‘market value’;
‘net profit’ versus ‘ cash flow’; a ‘statement of financial
4. explain “agency problems” and describe some possible position’ versus a ‘statement of financial performance’;
ways to control and reduce them, and ‘marginal’ versus ‘average’ tax rates.
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
3 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
5 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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1
Managerial Finance Lecture Notes
Accounting information and earnings can be very different 2 $10 000 $10 000
to cash flows.
3 $20 000 $0
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
7 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
9 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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A firm’s capital structure is the specific mix of debt and Involves the decision of whether to pay a dividend to
equity used to finance the firm
firm’s
s operations. shareholders or maintain the funds within the firm for
greater internal growth.
Decisions need to be made on both the financing mix and
how and where to raise money. The final decision will depend on the policies of the firm.
2
Managerial Finance Lecture Notes
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
13 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
14
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
15 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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– the ease with which management can be replaced if it – management compensation schemes; and
does not act in shareholders’ best interests.
– the threat of takeover.
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
17 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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3
Managerial Finance Lecture Notes
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
19 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
21 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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q
Individuals decide on consumption choices based on their
tastes and preferences and the investment
opportunities available to them.
4
Managerial Finance Lecture Notes
Period 2
Production possibility
130 frontier – shows cash
Opportunities facing firms in a two-period world include: flows from investment in
110 real assets
– investment in real assets
– payment of dividends
80
Best investment
70 100 130
Period 1
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
25 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
27 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
29 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
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5
Managerial Finance Lecture Notes
• Investment decision ⇒ a company can make decisions • The point of utility maximisation can be reached
in the interests of every shareholder. through one of two rules:
– Net present value rule: invest so as to maximise the net
present value of the investment.
• Financing g decision ⇒ there exists a single
g market
interest rate. – Rate-of-return rule: Invest up to the point at which the
marginal return on the investment is equal to the
expected rate of return on equivalent investments in the
• Dividend decision ⇒ provided a company does not financial markets.
alter its investment decision, the dividend decision
does not affect shareholder’s wealth.
Copyright © 2007 McGraw-Hill Australia Pty Ltd Copyright © 2007 McGraw-Hill Australia Pty Ltd
. PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
Jordan
31 . PPTs t/a Fundamentals of Corporate Finance 4e, by Ross, Thompson, Christensen, Westerfield &
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