FUNDAMENTALS OFFUNDAMENTALS OFCORPORATE FINANCECORPORATE FINANCE

MGF301 Fall 1998

Vigdis BoassonSUNY at Buffalo

vwb@acsu.buffalo.edu

Chapter 1 Introduction to Corporate Finance

Chapter 2 Financial Statements, Taxes, and Cash Flow

Chapter 3 Working with Financial Statements

Chapter 4 Long-Term Financial Planning and Growth

Chapter 5 Introduction to Valuation: The Time Value of Money

Chapter 6 Discounted Cash Flow Valuation

Chapter 7 Interest Rates and Bond Valuation

Chapter 8 Stock Valuation

Chapter 9 Net Present Value and Other Investment Criteria

Chapter 10 Making Capital Investment Decisions

Chapter 11 Project Analysis and Evaluation

Chapter 12 Some Lessons from Capital Market History

Table of Contents

Chapter 13 Return, Risk, and the Security Market Line

Chapter 14 Cost of Capital

Chapter 15 Raising Capital

Chapter 16 Financial Leverage and Capital Structure Policy

Chapter 17 Dividends and Dividend Policy

Chapter 18 Short-Term Finance and Planning

Chapter 19 Cash and Liquidity Management

Chapter 20 Credit and Inventory Management

Chapter 21 International Corporate Finance

Table of Contents (continued)

1.1 Chapter OutlineChapter 1

Introduction to Corporate Finance 1.1 Corporate Finance and the Financial Manager 1.2 The Corporate Form of Business Organization 1.3 The Goal of Financial Management 1.4 The Agency Problem and Control of the Corporation 1.5 Financial Markets and the Corporation 1.6 Summary and Conclusions

1.1 What is Corporate Finance?

1. What long-term investments should we make?

2. Where will we get the funds to pay for our investment?

3. How will we collect from customers to pay our bills?

1.2 A Simplified Organizational Chart (Figure 1.1)

Chairman of the Board and Chief Executive Officer (CEO)

Board of Directors

President and ChiefOperations Officer (COO)

Vice PresidentMarketing

Vice PresidentFinance (CFO) Vice President

Production

Treasurer Controller

Cash Manager Credit Manager Tax ManagerCost AccountingManager

CapitalExpenditures

FinancialPlanning

FinancialAccountingManager

Data ProcessingManager

1.3 Forms of Organization Sole Proprietorship

A business owned by a single individual.

The owner keeps all the profits but has unlimited liability for business debts.

PartnershipA Business formed by two or more individuals or entities.

General Partnership / Limited Partnership

Corporation

A business created as a distinct legal entity composed of one or more individuals or entities

Limited Liability Company

1.4 Limited Liability Companies

Limited Liability Companies (LLCs) Created by state law Governed by the “operating agreement” (rather

than articles of incorporation) Ownership interests - may or may not be

evidenced by ownership shares Legal and Economic Considerations

LLC “members” (i.e., owners) have limited liability

LLC is treated as a partnership for tax purposes

1.5 The Goal of Financial Management

The Goal of Financial Management The goal of financial management is to

maximize the current value per share of the existing stock.

Three equivalent goals of financial management:

Maximize shareholder wealth

Maximize share price

Maximize firm value

1.6 The Agency ProblemThe Agency Problem The agency relationship

The relationship between stockholders and management.

Will managers work in the shareholders’ best interests?

Agency costs

Direct agency costs:Management compensation

Indirect agency costs: monitoring managers and suboptimal

decisions.

1.7 Financial Markets Cash flows to and from the firm

A firm issues securities to realize cash for investment in assets. The operating cash flows generated from the investment in assets allows for payment of taxes, reinvestment in new assets, and payment of interest and dividends to the investors in the firm’s securities. The financial markets bring the buyers and sellers of debt and equity securities together.

Primary markets:Public offers, SEC registration, underwriters.

secondary markets: Stock exchange (NYSE,AMEX), OTC, Nasdaq.

1.8 Cash Flows between the Firm and the Financial Markets (Figure 1.2)

Total Value ofFirm’s Assets

Total Value of the Firmto Investors in

the Financial Markets

B. Firm invests in assets

Current AssetsFixed Assets

C. Cash flow from firm’s assets

D. Government

E. Retained cash flows

A. Firm issues securities

F. Dividends and

debt payments

FinancialMarkets

Short-term debtLong-term debtEquity shares

1.9 Chapter 1 Quick QuizQuick Quiz

1. Who performs the financial management function in the typical corporation?

2. What are the major advantages and disadvantages of the corporate form of organization?

3. Why is shareholder wealth maximization a more appropriate goal than profit maximization?