WARNING

This collection of slides provides an idea of the course

structure and key words.

It is NOT intended to substitute the readings required

by the instructor.

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 TCHE321
CORPORATE FINANCE
Nguyen Manh Hiep
2020

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CHAPTER 1
INTRODUCTION

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 In this chapter:
• WHAT IS CORPORATE
I. FINANCE?

• CORPORATE
II. GOVERNANCE

• HOMEWORK
III
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 GUIDE TO TCHE321
 Go to the website. Download the reference guide,
the slides. Supplementary materials are sent by
email.
 Ask questions in class or by email. Arrange
rendezvous with the instructor if needed.
 Mid-term 40%: daily oral tests, in-class
performance, mid-term paper test(s). Final-term
60%: paper test.
 Historical statistics: Grade A ~ 5%, B ~ 25%. C
~25%. D ~25%. F ~20%.
 COURSE CONTENT
 Chapter 1: Introduction
 Chapter 2: Financial Statement Analysis
 Chapter 3: Investment Appraisal
 Chapter 4: Asset Pricing Models
 Chapter 5: Capital Structure
 Chapter 6: Dividend Policy
 Chapter 7: Working Capital Management
 I. WHAT IS CORPORATE
FINANCE?
 What is finance?
A branch of economics that deals with allocating
limited resources to its best use.
 What is a corporation?
A group of ppl who work together for a specific goal
(money, etc.)

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 I. WHAT IS CORPORATE
FINANCE?
 The financial system
Public Finance

We focus on
Corporate Finance
(one major part of Financial
Business Finance)
Markets
Financial
Institutions

Business Finance Personal Finance

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 I. WHAT IS CORPORATE
FINANCE?
A business/A company/A firm is a group of natural or
legal persons working together towards specific goals.
Types of Business Ownership
We focus on
 Proprietorship. Corporations
 Partnership. (Depends much on personal reputation of the owner – e.g. in
law, consultants, etc.)

 Corporation.
 Are there other types of business organization?
 What is a co-operative? (Hợp tác xã)
 Can the owner of a sole proprietorship withdraw capital from the firm?
 Can the owners of a corporation withdraw capital from the firm? Is it a good
or a bad thing that they can/cannot withdraw their capital? 9
 I. WHAT IS CORPORATE
FINANCE?
Discussion: Compare a proprietorship and a corporate
in the following aspect:
 Set-up cost.
 Size.
 Decision making process.
 Risk to owner(s).
 Income tax.
 Labor cost.
…

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 I. WHAT IS CORPORATE
FINANCE?
Some questions
 In Vietnam, does a sole proprietorship pay enterprise income tax?
 In a partnership, what is a general partner? What is a limited partner?
 What is a public company? What is a private company?
 What is a share of stock?
 What is a corporate charter (giay chung nhan dang ky cong ty)? Bylaws
rules that govern how a company is run, one of the first documents
established by BOD?

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 I. WHAT IS CORPORATE
FINANCE?
 Types of firms in the U.S.

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Source: www.irs.gov; Berk, DeMarzo Corporate Finance 4th edition.
 I. WHAT IS CORPORATE
FINANCE?
Example X
 Tuan Bach Limited has a debt of 100 bil. on the
balance sheet payable in one year. Value of all asset is
now 80 bil.
 There is one investment opportunity available: Initial
investment 50 bil. In one year, there is a probability of
30% that the return is 100 bil (win). and 70% that the
return is 0 (fail).
 Tuan Bach is the only owner and manager of the
company.
 I. WHAT IS CORPORATE
FINANCE?
Example X (cont.)
1. If Tuan Bach decides not to invest. In one year,
the value to Tuan Bach and debtholder will be:
a/ 80 bil and 20 bil b/ 100 bil and 0 bil
c/ Other 0 - 80
2. If Tuan Bach decides to invest and fail, in one
year the value to Tuan Bach and debtholders will
be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 50 bil and 0 bil d/ Other 0 - 30
 I. WHAT IS CORPORATE
FINANCE?
Example X (cont.)
3. If Tuan Bach decides to invest and win. In one year, the
value to Tuan Bach and debtholders will be:
a/ 100 bil and 0 bil b/ 80 bil and 20 bil
c/ 100 bil and 50 bil d/ Other 30 - 100
4. If you were Tuan Bach, what would you do?
a/ Invest Vì k invest thì value to TB cũng = 0, invest
fail = 0, invest đúng thì đc 30
b/ Do not invest
c/ Go America to hide from lenders
 I. WHAT IS CORPORATE
FINANCE?
Example Y
 Tuan Bach Limited has a debt of 100 bil. on the balance
sheet payable in one year. Value of all asset is now 40
bil.
 There is one investment opportunity available: Initial
investment 50 bil. In one year there is a probability of
70% that the return is 100 bil (win). and 30% that the
return is 0 (fail).
 Lenders refuse to lend. Tuan Bach can only raise capital
through equity issue to himself, i.e., contributing more
capital of $10 to the firm.
 I. WHAT IS CORPORATE
FINANCE?
Example Y (cont.)
1. If Tuan Bach decides to invest and fail, in one year the
value to Nicolas shareholders and debtholders will be:
a/ 0 bil and 0 bil b/ 0 bil and 40 bil
c/ 0 bil and 50 bil d/ Other
2. If Tuan Bach decides to invest and win. In one year, the
value to Nicolas shareholders and debtholders will be:
a/ 50 bil and 100 bil b/ 70 bil and 0 bil
c/ 0 bil and 70 bil d/ Other
 I. WHAT IS CORPORATE
FINANCE?
Example Y (cont.)
3. If you were Tuan Bach, what would you do?
a/ Contribute more capital to invest.
b/ Do not invest.
c/ Go America to hide from lenders.
d/ Other. SCĐ
 I. WHAT IS CORPORATE
FINANCE?
 Organizational Chart of a Corporation

Berk, DeMarzo Corporate Finance 4th edition.

 Where are the shareholders in this chart?
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 I. WHAT IS CORPORATE
FINANCE?
What Financial Officers do in a Corporation
 Investment decisions
 Financing decisions – relates to lenders & SH
 Operating decisions (Long term decision must be
made first, then day-to-day operating decisions)
 Which decision must be made first? Đỏ vàng xanh

Example: What type of decision are these?

Tuan Bach Inc. buys from vendors on credit and
requires cash payment immediately when selling to
customers. Applies for a loan from a bank to build a20
 I. WHAT IS CORPORATE
FINANCE?
Example:
 Sacom Investment and Development Corporation
in 2011 buys VND31 billion worth of Quốc Cường
Gia Lai shares. (Investing activities)
 Bibica Corporation from 2007 to 2010 reduces
debt-to-assets from 0.45 to 0.28. (Financing
activities)

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 I. WHAT IS CORPORATE
FINANCE?
The goal of financial decisions?
Maximizing shareholders’ value
(The law does not require managers to do this)
 Why? What about other stakeholders and the society? See more: Milton Friedman (1970): The
Social Responsibility of Business Is to Increase Its Profits.
 Do shareholders own the firm (Own at least 1 share of the firm) ? Who decides where firm profit
goes (shareholder – Điều 76)? Does the law require that the firm must act to achieve this goal (No)?
See Điều 165 Luật Doanh nghiệp 2020.

What is shareholders’ value?

Stock price
 Jensen (2001), Value Maximization, Stakeholder Theory, and the Corporate Objective Function.
 Does everyone agree? See more: Shareholders VS Stakeholders, A New Idolatry (The Economist),
Unilever Warning on “Shareholder Value” (FT), Welch Condemns Share Price Focus (FT),
Shareholder value: Investors must learn to respect long-term thinking (FT), We must rethink the
purpose of the corporation (FT), Beyond the bottom line: should business put purpose before profit?
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(FT), Shareholders are being dethroned as rulers of value (FT).
 II. CORPORATE GOVERNANCE

Principal-Agent Problem
 Managers are agents of shareholders but act for
their own self-interest.
 That imposes a cost to shareholders (agency
cost).
 Are managers really agents of shareholders? Do they say they are? Do
they believe they are? Do they act as if they are?

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 II. CORPORATE GOVERNANCE

Means to Mitigate Principal-Agent Problem

 Ownership/Stock-based compensation.
 Incentive pay.
 Long-term contract.
 Good corporate governance practice: a system of
principles, policies, procedures and clearly
defined responsibilities and accountabilities that
helps to reduce the conflicts of interest.
 What empirical studies say about their effectiveness?

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 II. CORPORATE GOVERNANCE
Example: Which of the following is often regarded as a
sign of ineffective corporate governance system?
 There is clear and measurable accountability for
managers and directors in assuming their
responsibilities.
 Three-quarters of board members are independent.
 CEO also serves as chairman of the board of directors.
 Disclosure regarding operations and financial position
are made with complete transparency and accuracy.
 Internal audit committee consists only of independent
directors who have expertise in financial and accounting
matters.
 II. CORPORATE GOVERNANCE
Example: Which of the following is least likely an approach the
shareholders use to manage the principal-agent problem?
 Participate in general meetings to discuss and vote on major
corporate issues and transactions.
 Elect and delegate a board of directors with oversight of the
company.
 Choose a prestigious independent auditor to audit the company’s
annual financial records.
 Regularly read and evaluate the company’s financial and non-
financial information.
 Build remuneration policies that align the interests of managers
and directors with those of shareholders.
 Vote for corporate social responsibility policies and
practices that promote labor welfare, environmental
 II. CORPORATE GOVERNANCE
Divergence VS Concentration of Ownership
 Mai Linh wants to expand her chain of fashion
shop. She may borrow or sell 30% of her equity in
the chain to raise fund.
 If Mai Linh borrows fund (or sells equity ), $1
incremental income (or expense) from the shops
will increase Mai Linh’s income by how much?
 Predict Mai Linh’s behavior in each case.
 Borrow: more incentive to work
 Sell equity: less incentive to work
 See more: Berle and Means (1932)
 II. CORPORATE GOVERNANCE
Management Entrenchment
Tuan Bach Corp. (100% equity) has 100 cash.
Corporate tax rate 25%, personal tax rate 15%.
Bank-deposit interest rate 5%. No investment
opportunity is viable.
 Should Tuấn Bách, CEO of Tuan Bach Corp, keep
this amount of cash to deposit it on a bank account
or should he pay out the money to shareholders
(by dividend)?
 II. CORPORATE GOVERNANCE
Short-term and long-term shareholders
 Tuan Bach, CEO, is considering a long-term
investment which requires a large capex,
generates no revenue in the first two years and
generates large revenue after the second year.
 Phuong Xuan is a master student who will need
to sell her shares next year to pay her tuition fee.
 Dieu Le is an office employer who has a stable
job and want to keep her shares until retirement.
 In the annual meeting, Tuan Bach asks the
shareholders to vote on the investment.
 II. CORPORATE GOVERNANCE
Majority and minority shareholders
 Tuan Bach owns 51% of shares in the company.
 Mai Linh owns 29% and Mai Anh owns 20%.
 Tuan Bach also owns NQ Inc, which is on the
brink of bankruptcy and priced at VND100/share.
 In the general meeting, Tuan Bach proposes an
M&A plan to buy NQ at VND10000/share.
 Predict if the M&A plan will be passed at the
shareholders meeting.
 II. CORPORATE GOVERNANCE
Socially (ir)responsible shareholders
 In the annual meeting, Mai Linh, CEO of Papery
Corp. proposes investing in a new technology of
waste production which would cost the company
a lot of money but will improve the company’s
CSR profile
CFO would go for projects which maximizes
financial benefits, eventhough it might go agst. a
group of responsible investors. IF they want,
they can sell all the shares and invest in good
ESG firms
 II. CORPORATE GOVERNANCE

Example: Which of the following cases most likely represent the

conflicts of interest between the shareholders and the
managers/directors?
 In order to finance growth, managers and directors decide to increase
borrowings to a level that would significantly increase default risk.
 Managers and directors decide to abandon product safety features to
reduce costs.
 A controlling shareholder who owns a 51% stake in the company
demand the managers and directors to buy inventory from his spouse’s
company at above market price.
 Managers and directors do not invest in high-risk projects even if
they have positive NPV because they want to protect their
employment status.
 Managers and directors decide to use accounting practices that reduce
the company’s tax expenses.
 III. HOMEWORK

Management self-dealing
 Find out what happened at Coteccons
Construction Joint Stock Company (CTD). Do
you think the management of this company is
good or bad? Do you approve the actions of
Kusto and Co.?
 III. HOMEWORK

Short-termism and Staggered boards

 Refer to Marginson2008, define short-termism
and its causes.
 Refer to Cremers2017, define a staggered board.
 Is staggered boards a desired corporate
governance practice? Explain using
Cremers2017.
 III. HOMEWORK

The Value of a Corrupt Manager (optional)

 Tuan Bach is a corrupt CEO. He doesn’t abide to
principles. He often finds ways to circumvent
rules and regulations to achieve his goals, for
example, by bribery, power abuse, bullying,
unethical competition, etc.
 Can Tuan Bach be good for a firm in any
circumstance? Refer to Mironov2015 to answer
this question.
 III. HOMEWORK

CEO traits and governance (optional)

 Refer to Cline2018, explain how managers’
indiscretion affect firm value.
 Refer to Jia2014, explain how masculinity of CEO
is related to financial misreporting.
 III. HOMEWORK

Stakeholder Capitalism (optional)

 Refer to the following link
 Stakeholder capitalism, shareholder capitalism and state capitalism | World Economic Forum
(weforum.org)
 A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its Profits - The N
ew York Times (nytimes.com)

 Refer to Webb2020 and Gual2020

 Explain how stakeholder capitalism is different
from shareholder capitalism.
 Which idea do you prefer?