FUNDAMENTALS OF CORPORATE FINANCE MGF301 Fall 1998 Vigdis Boasson SUNY at Buffalo...
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Transcript of FUNDAMENTALS OF CORPORATE FINANCE MGF301 Fall 1998 Vigdis Boasson SUNY at Buffalo...
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FUNDAMENTALS OFFUNDAMENTALS OFCORPORATE FINANCECORPORATE FINANCE
MGF301 Fall 1998
Vigdis BoassonSUNY at Buffalo
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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
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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)
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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
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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?
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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
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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
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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
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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
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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.
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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.
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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
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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?