soft.studa.com_Ch01(1).ppt

1-1,CHAPTER,1,Introduction to Corporate Finance,1-2,Chapter Outline,1.1 What is Corporate Finance?1.2 Corporate Securities as Contingent Claims on Total Firm Value1.3 The Corporate Firm1.4 Goals of the Corporate Firm1.5 Financial Markets1.6 Outline of the Text,1-3,What is Corporate Finance?,Corporate Finance addresses the following three questions:What long-term investments should the firm engage in?How can the firm raise the money for the required investments?How much short-term cash flow does a company need to pay its bills?,1-4,The Balance-Sheet Modelof the Firm,1-5,The Balance-Sheet Modelof the Firm,Current Assets,Fixed Assets1 Tangible2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,What long-term investments should the firm engage in?,The Capital Budgeting Decision,1-6,The Balance-Sheet Modelof the Firm,How can the firm raise the money for the required investments?,The Capital Structure Decision,Current Assets,Fixed Assets1 Tangible2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,1-7,The Balance-Sheet Modelof the Firm,How much short-term cash flow does a company need to pay its bills?,The Net Working Capital Investment Decision,Net Working Capital,Shareholders Equity,Current Liabilities,Current Assets,Fixed Assets1 Tangible2 Intangible,Long-Term Debt,1-8,Capital Structure,The value of the firm can be thought of as a pie.,The goal of the manager is to increase the size of the pie.,The Capital Structure decision can be viewed as how best to slice up a the pie.,If how you slice the pie affects the size of the pie,then the capital structure decision matters.,50%Debt,50%Equity,1-9,Hypothetical Organization Chart,1-10,The Financial Manager,To create value,the financial manager should:Try to make smart investment decisions.Try to make smart financing decisions.,1-11,Cash flowfrom firm(C),The Firm and the Financial Markets,Taxes(D),Firm issues securities(A),Retained cash flows(F),Investsin assets(B),Dividends anddebt payments(E),Current assetsFixed assets,Short-term debtLong-term debtEquity shares,Ultimately,the firm must be a cash generating activity.,The cash flows from the firm must exceed the cash flows from the financial markets.,1-12,1.2 Corporate Securities as Contingent Claims on Total Firm Value,The basic feature of a debt is that it is a promise by the borrowing firm to repay a fixed dollar amount of by a certain date.The shareholders claim on firm value is the residual amount that remains after the debtholders are paid.If the value of the firm is less than the amount promised to the debtholders,the shareholders get nothing.,1-13,Debt and Equity as Contingent Claims,$F,Debt holders are promised$F.,If the value of the firm is less than$F,they get the whatever the firm if worth.,If the value of the firm is more than$F,debt holders get a maximum of$F.,If the value of the firm is less than$F,share holders get nothing.,If the value of the firm is more than$F,share holders get everything above$F.,Algebraically,the bondholders claim is:Min$F,$X,Algebraically,the shareholders claim is:Max0,$X$F,1-14,$F,Debt holders are promised$F.,If the value of the firm is less than$F,the shareholders claim is:Max0,$X$F=$0 and the debt holders claim is Min$F,$X=$X.The sum of these is=$X,If the value of the firm is more than$F,the shareholders claim is:Max0,$X$F=$X$F and the debt holders claim is:Min$F,$X=$F.The sum of these is=$X,Combined Payoffs to Debt and Equity,1-15,1.3 The Corporate Firm,The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.However,businesses can take other forms.,1-16,Forms of Business Organization,The Sole ProprietorshipThe PartnershipGeneral PartnershipLimited PartnershipThe CorporationAdvantages and DisadvantagesLiquidity and Marketability of OwnershipControlLiabilityContinuity of ExistenceTax Considerations,1-17,A Comparison of Partnershipand Corporations,1-18,1.4 Goals of the Corporate Firm,The traditional answer is that the managers of the corporation are obliged to make efforts to maximize shareholder wealth.,1-19,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.,1-20,Managerial Goals,Managerial goals may be different from shareholder goalsExpensive perquisitesSurvivalIndependenceIncreased growth and size are not necessarily the same thing as increased shareholder wealth.,1-21,Separation of Ownership and Control,Board of Directors,Management,Assets,Debt,Equity,Shareholders,Debtholders,1-22,Do Shareholders ControlManagerial 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 talentthis may provide market discipline to the managersthey can be replaced.If the managers fail to maximize share price,they may be replaced in a hostile takeover.,1-23,1.5 Financial Markets,Primary MarketWhen a corporation issues securities,cash flows from investors to the firm.Usually an underwriter is involvedSecondary MarketsInvolve the sale of“used”securities from one investor to another.Securities may be exchange traded or trade over-the-counter in a dealer market.,1-24,Financial Markets,Firms,Investors,Sue,Bob,1-25,Exchange Trading of Listed Stocks,Auction markets are different from dealer markets in two ways:Trading in a given auction exchange takes place at a single site on the floor of the exchange.Transaction prices of shares are communicated almost immediately to the public.,1-26,1.6 Outline of the Text,OverviewValue and Capital BudgetingRiskCapital Structure and Dividend PolicyLong-Term FinancingOptions,Futures and Corporate FinanceFinancial Planning and Short-Term FinanceSpecial Topics,