Chapter 1

Introduction to Corporate Finance

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter
ChapterOutline
Outline
• Corporate Finance and the Financial
Manager

• Forms of Business Organization

• The Goal of Financial Management

• The Agency Problem and Control of the

Corporation
1-2

• Financial Markets and the Corporation

 Chapter
ChapterOutline
Outline
• Corporate Finance and the Financial
Manager

• Forms of Business Organization

• The Goal of Financial Management

• The Agency Problem and Control of the

Corporation
1-3

• Financial Markets and the Corporation

 Corporate Finance
What do you need to have in order to
start a business?

Money?
Ideas?

What do you need first?

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 Corporate Finance
Some important questions that are answered using
finance:

1. What long-term investments should the firm take

on?

2. Where will we get the long-term financing to pay

for the investment?

3. How will we manage the everyday financial

1-5 activities of the firm?
 Corporate Finance
What is the difference between the first two questions and
the third one?

Short term decisions versus Long term decisions

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1-7

The Balance-Sheet Model

of the Firm
The Net Working Capital Investment Decision
Current
Current Liabilities
Assets Net
Working Long-Term
Capital
Debt
Fixed Assets
How much short-
1 Tangible term cash flow
Shareholders’
2 Intangible does a company
need to pay its Equity
bills?

McGraw-Hill/Irwin
Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
1-8

The Balance-Sheet Model

of the Firm
The Net Working Capital Investment Decision
Current Current
Assets Liabilities
Net
Working
Capital

Fixed Assets Long-Term

How much short-
1 Tangible Debt
term cash flow
2 Intangible does a company Shareholders’
need to pay its Equity
bills?

McGraw-Hill/Irwin
Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
 Financial Managers
Chief Financial Officer (CFO):The
top financial manager within a firm
(Giám đốc tài chính)
Treasurer: Oversees cash
management, credit management,
capital expenditures, and financial
planning
(Giám đốc nguồn vốn)
Controller: Oversees taxes, cost
accounting, financial accounting and
data processing
1-9
(Kế toán trưởng)
 Hypothetical Organization Chart
Board of Directors

Chairman of the Board and

Chief Executive Officer (CEO)

President and Chief

Operating Officer (COO)

Vice President and

Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager Credit Manager Tax Manager Cost Accounting

Capital Expenditures Financial Planning Financial Accounting Data Processing

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 Financial Management Decisions
• Capital budgeting (Long-term investment
decision)
• What long-term investments or projects should
the business take on?

• Capital structure (Long-term financing decision)

• How should we pay for our assets?
• Should we use long-term debt or equity?

• Working capital management

• How do we manage the day-to-day finances of
1-11
the firm?
 Chapter Outline
• Corporate Finance and the Financial Manager

• Forms of Business Organization

• The Goal of Financial Management

• The Agency Problem and Control of the

Corporation

• Financial Markets and the Corporation

1-12
 Forms of Business Organization in
the U.S.

Sole • Single Owner

Proprietorship

• General
Partnership • Limited

• C-Corporation
• S-Corporation
Corporation • Limited Liability Company
(LLC)
1-13
 Forms of Business Organization in
the U.S.

Sole • Single Owner

Proprietorship

• General
Partnership • Limited

• C-Corporation
Corporation • S-Corporation
• Limited Liability Company (LLC)
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 Sole Proprietorship
Advantages:

• Easiest to start
• Least regulated
• Single owner keeps all the
profits
• Taxed once as personal
income
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 Sole Proprietorship
Disadvantages:
• Limited to life of owner
• Equity capital limited to
owner’s personal wealth
• Unlimited liability
• Difficult to sell ownership
interest

1-16
 Forms of Business Organization in
the U.S.

Sole • Single Owner

Proprietorship

• General
Partnership • Limited

• C-Corporation
Corporation • S-Corporation
• Limited Liability Company (LLC)
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 Partnership
Advantages:

• Two or more owners

• More capital available
• Relatively easy to start
• Income taxed once as
personal income

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 Partnership
Disadvantages:
• Unlimited liability
General partnership
Limited partnership
• Partnership dissolves when
one partner dies or wishes to
sell
• Difficult to transfer
ownership
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 Corporation
Advantages:
• Limited liability
• Unlimited life
• Separation of ownership
and management
• Transfer of ownership is
easy
• Easier to raise capital
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 Corporation
Disadvantages:
• Separation of ownership
and management

• Double taxation (income

taxed at the corporate
rate and then dividends
taxed at the personal
rate)

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 Corporation
Close corporation=Privately held corporation=private corporation
(Công ty cổ phần nội bộ= Công ty cổ phần đóng)
IPO: Initial public offerings
Phát hành lần đầu ra công chúng
(Public)
Public corporation = Publicly held corporation
(Công ty cổ phần đại chúng)

Listed corporation Unlisted public corporation

(Công ty niêm yết) (Công ty đại chúng chưa niêm yết)

Official stock exchanges OTC (Over the counter market)

(Sở giao dịch chứng khoán) (Thị trường phi tập trung)
1-22
 Chapter Outline

• Corporate Finance and the Financial

Manager
• Forms of Business Organization
• The Goal of Financial Management
• The Agency Problem and Control of the
Corporation

• Financial Markets and the Corporation

1-23
 Goal of Financial Management
What should be the goal of a corporation?
Maximize profits?
Minimize costs?
Maximize market share?
Maximize the current value of the company’s
stock?

Does this mean we should do anything

and everything to maximize owner
wealth?

1-24
 Goal of Financial Management
In micro economics: Profit maximization.

Why “profit maximization” is not the primary goal in

financial management?
1. First, this objective is ambiguous: Which profit to
maximize?
Accounting profit; Economic profit; Long-term profit;
Short-term profit.
Example: R&D (Research and development) cost
2. Second, this objective ignores the time value of money
3. Third, this objective ignores the relationship between
risk and return.
1-25
TOP R&D spenders
 Two most important principles in financial management

1st principle: Time value of money

(Giá trị thời gian của tiền)
Money changes value overtime.

2nd principle: Risk and return tradeoff.

(Đánh đổi rủi ro – lợi nhuận)
The higher the risk, the higher the expected return.

1-26
 Risk and return tradeoff
Required rate of return
(Tỷ suất sinh lời yêu cầu/đòi hỏi)

Discount rate
Expected rate
Hurdle rate (Ngưỡng sinh lời)
of return
IRR>Hurdle rate Accepted

Opportunity cost of investment

Cost of capital
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 Goal of Financial Management

Maximization of shareholder wealth.

Shareholder wealth: Example

Jeff Bezos
Net Worth: $107.3 billion (2019).

= Number of shares*Market price of one share

Founder: Amazon (AMZN)

28
 Chapter Outline

• Corporate Finance and the Financial

Manager
• Forms of Business Organization
• The Goal of Financial Management
• The Agency Problem and Control of the
Corporation

• Financial Markets and the Corporation

1-29
 The Agency Problem
Agency relationship
• Principal hires an agent to represent his/her
interests
• Stockholders (principals) hire managers
(agents) to run the company
Agency problem
Conflict of interest between principal and
agent
Management goals and agency costs
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 Separation of Ownership and Control

Board of Directors

Debtholders

Shareholders
Management

Debt
Assets
Equity
1-
31
 Separation of Ownership and Control

Do the managers of the corporation make

efforts to maximize shareholder wealth?

The traditional answer is that the managers

of the corporation are obliged to make
efforts to maximize shareholder wealth.
Câu trả lời truyền thống là các nhà quản lý
của tập đoàn có nghĩa vụ nỗ lực tối đa hóa
tài sản của cổ đông.
1-
32
 Managing Managers
Bồi thường quản lý Managerial compensation
Các ưu đãi có thể được sử • Incentives can be used to
dụng để điều chỉnh lợi ích của align management and
ban quản lý và cổ đông stockholder interests
Các biện pháp khuyến khích • The incentives need to be
cần được cấu trúc cẩn thận structured carefully to make
để đảm bảo rằng chúng đạt
được mục tiêu
sure that they achieve their
goal
Kiểm soát doanh nghiệp
Corporate control
Mối đe dọa của việc tiếp quản
có thể dẫn đến quản lý tốt hơn The threat of a takeover
may result in better
Các bên liên quan khác management
1-33

Other stakeholders
 The Set-of-Contracts Perspective
 The firm can be viewed as a set of contracts.
 One of these contracts is between shareholders and managers.
 The managers will usually act in the shareholders’ interests.
The shareholders can devise contracts that align the incentives of
the managers with the goals of the shareholders.
The shareholders can monitor the managers behavior.
 This contracting and monitoring is costly.
 Công ty có thể được xem như một tập hợp các hợp đồng.
 Một trong những hợp đồng này là giữa các cổ đông và các nhà quản
lý.
 Các nhà quản lý thường sẽ hành động vì lợi ích của các cổ đông.
 Các cổ đông có thể đưa ra các hợp đồng điều chỉnh các ưu đãi của các
nhà quản lý với các mục tiêu của các cổ đông.
1-
34Các cổ đông có thể giám sát hành vi của các nhà quản lý.
 Do Shareholders Control Managerial Behavior?

Shareholders vote for the board of directors,

who in turn hire the management team.
Contracts can be carefully constructed to be
incentive compatible.
There is a market for managerial talent—this
may provide market discipline to the managers
—they can be replaced.
If the managers fail to maximize share price,

1-
they may be replaced in a hostile takeover.
35
 Work the Web Example
The Internet provides a wealth of information about
individual companies

One excellent site is finance.yahoo.com

Click on the web surfer to go to the site, choose a

company and see what information you can find!

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 Chapter Outline

• Corporate Finance and the Financial

Manager
• Forms of Business Organization
• The Goal of Financial Management
• The Agency Problem and Control of the
Corporation

• Financial Markets and the Corporation

1-37
 Financial Markets
Cash flows to the firm
Primary vs. secondary markets
Dealer vs. auction markets
Listed vs. over-the-counter securities
NYSE
NASDAQ

1-38
 Figure 1 Flows of Funds Through the
Financial System

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2-39 © 2016 Pearson Education, Inc. All rights reserved.
 Financial Markets

Stocks and
Investors
Bonds
Firms securities
Money Bob Sue
money

Primary Market
Secondary
Market

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2-40 © 2016 Pearson Education, Inc. All rights reserved.
 Primary market (thị trường sơ cấp) is the market for
newly issued shares.
Secondary market (thị trường thứ cấp) is the market for
“second hand” shares.
Institutional investor: Nhà đầu tư tổ chức (funds,
investment banks, insurance companies).
For example, you want to buy clothes from China and sell
them in Vietnam. If you can the clothes from the producer
(primary market). If you sell the clothes to some shops in
Vietnam (secondary market)

2-41 © 2016 Pearson Education, Inc. All rights reserved.

 Ethics Issues
 Is it ethical for tobacco companies to sell a product that is
known to be addictive and a danger to the health of the user? Is
it relevant that the product is legal?

 Should boards of directors consider only price when faced with

a buyout offer?

 Is it ethical to concentrate only on shareholder wealth, or

should stakeholders as a whole be considered?

 Should firms be penalized for attempting to improve returns by

1-42 stifling competition (e.g., Microsoft)?
 Terminology

• CFO (Chief Financial Officer)

• Sole Proprietorship
• Partnership
• C-, S-, and LLC Corporations
• “Agency” Problem

1-43
 Key Concepts and Skills

• Role of the financial manager

• Corporation classifications
• Goal of financial management
• Potential conflicts between
financial managers and
shareholders

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 What are the most
important topics of this
chapter?
1. The CFO’s role in a corporation.

2. Why does the corporation

classification matter?

3. Corporate manager’s possible

conflicting goal with the
owners of the company.

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