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Introduction To Corporate Finance

Corporate finance is the study to answer the following questions: what type of LT investments should we take on? what lines of business will we be able to be in and what sort of buildings, machinery, and equipment will we need? Where will we get the LT financing to pay for our investment? will we bring in other owners or will we borrow the money? how will we manage our everyday financial activities such as collecting from customers and paying suppliers?

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Aigerim Sapiyeva
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43 views14 pages

Introduction To Corporate Finance

Corporate finance is the study to answer the following questions: what type of LT investments should we take on? what lines of business will we be able to be in and what sort of buildings, machinery, and equipment will we need? Where will we get the LT financing to pay for our investment? will we bring in other owners or will we borrow the money? how will we manage our everyday financial activities such as collecting from customers and paying suppliers?

Uploaded by

Aigerim Sapiyeva
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Chapter

Introduction to Corporate Finance


FIN311 Corporate Finance Lecturer: G. Kholdjigitov
McGraw-Hill/Irwin
Copyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

This lectures considers the following issues


Notion of corporate finance Role of financial manager Organisational chart of a corporation Forms of business organisation

Goals of financial management


Agency problem

Relations between financial markets and the corporation


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What is corporate Finance?


Corporate finance is the study to answer the following questions: What type of LT investments should we take on? What lines of business will we be able be in and what sort of buildings, machinery, and equipment will we need? Where will we get the LT financing to pay for our investment? Will we bring in other owners or will we borrow the money? How will we manage our everyday financial activities such as collecting from customers and paying suppliers?

1-3

Financial management decisions


Financial manager (CFO) is in charge of making financial decisions about: Capital budgeting (process of planning and managing a firms LT investments, i.e. evaluate size, timing, and risk of future cash flows) Capital structure (the mixture of debt and equity maintained by a firm, i.e. how much to borrow and what is the cheapest way?) Working capital management (current assets (CA) current liabilities (CL), i.e. ST liquidity issue)

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Typical Simple Organization Chart


Board of Directors (Owners) Chief Executive Officer (CEO)

Chief Operations Officer (COO)


Vice president Marketing Treasure Chief Financial Officer (CFO) Vice President production

Controller

Cash Manager Capital Expenditure

Credit Manager Financial Planning

Tax Manager Financial Accounting Manager

Cost Accounting Manager Data Processing Manager 1-5

Sources: Ross et al.,2006:3

Forms of Business Organizations

Sole Proprietorship

Partnership

Corporation

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Forms of Business Organizations (2)


Sole proprietorship (a business owned by a single individual) Partnership (a business formed by 2 or 3 more individuals or entities) Corporation (a business created as a distinct legal entity composed of one or more individuals or entities)
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Reporting Ownership Equity in the Balance Sheet


Sole Proprietorship

Owner's equity: Jill Jones, capital $ 8,000

Partnership

Partners' equity Jill Jones, capital $ 4,000 Bill Jones, capital 4,000 Total partners' equity

$ 8,000

Corporation

Stockholders' equity Capital stock $ 7,000 Retained earnings 1,000 Total stockholders' equity

$ 8,000
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Goals of financial management


Possible financial goals
Survive

Avoid financial distress and bankruptcy


Beat the competition Maximise sales or market share Minimise costs Maximise profits

Maintain steady earnings growth


Main goal: To maximise the current value per share of the existing stock
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The possibility of conflict of interest between the stockholders and management of a firm Management goals may differ from owners (managers are also concerned with their personal wealth, job security, fringe benefits, and lifestyle) Managerial compensation Control of the firm Proxy fight Stakeholders someone other than stockholders or creditors who potentially have a claim on the cash flows of the firm 1-10

Agency problem

Financial markets and the corporation


Total value of firms assets Total value of firms to investors in the fin. market
A. Firms issues securities

E. Reinvested cash flows

B. Firm invests in C. CF from firms assets assets (CA, FA)

F. Dividends and debt payments

Financial markets (ST debt, LT debt, equity shares)

D. Government (other stakeholders)

Source: Ross (2005:15)

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The two key financial markets are the money market and the capital market Transactions in short term marketable securities take place in the money market while transactions in long-term securities take place in the capital market Whether subsequently traded in the money or capital market, securities are first issued through the primary market The primary market is the only one in which a corporation or government is directly involved in and receives the proceeds from the transaction Once issued, securities then trade on the secondary markets such as the New York Stock Exchange or NASDAQ 1-12

Financial markets

Securities Exchanges
Over-the-Counter Exchange The over-the-counter (OTC) market is an

intangible market for securities transactions


Unlike organized exchanges, the OTC is both a primary market and a secondary market The OTC is a computer-based market where dealers make a market in selected securities and

are linked to buyers and sellers through the


NASDAQ System Dealers also make money on the spread
1-13

Chapter

End of Chapter 1

McGraw-Hill/Irwin

Copyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

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