Chapter 1.
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Chapter 1: Introduction to Corporate Finance
1. What Is Corporate Finance?
1. THE BALANCE SHEET MODEL OF THE FIRM
Figure 1 The Balance Sheet Model of the Firm
short-term debt is called a current liability.
Short-term debt represents loans and other obligations that must be repaid within
one year.
Shareholders’ equity represents the difference between the value of the assets and
the debt of the firm.
We use the term capital budgeting to describe the process of making and
managing expenditures on long-lived assets.
short-term cash flow problems come from the mismatching of cash inflows and
outflows.
1. THE FINANCIAL MANAGER
The treasurer is responsible for handling cash flows, managing capital
expenditure decisions, and mak- ing financial plans.
The controller handles the accounting function, which includes taxes, cost and
financial accounting, and information systems.
Figure 2 Hypothetical Organization Chart
2. The Corporate Firm
3. The Importance of Cash Flows
job of a financial manager is to create value from the firm’s capital budgeting,
financing, and net working capital activities.
Try to buy assets that generate more cash than they cost.
Sell bonds, stocks, and other financial instruments that raise more cash
than they cost.
Figure 3 Cash Flows between the Firm and the Financial Markets
2. IDENTIFICATION OF CASH FLOWS
accounting principles (GAAP), the sale is recorded even though the customer
has yet to pay.
corporate finance, Value creation depends on cash flows. Value creation
depends on whether and when it actually receives payment.
1. TIMING OF CASH FLOWS
The value of an investment made by a firm depends on the timing of cash flows.
individuals prefer to receive cash flows earlier rather than later (One dollar
received today is worth more than one dollar received next year)
4. The Goal of Financial Management
the goal of financial management is to make money or add value for the owners.
1. THE GOAL OF THE FINANCIAL MANAGER
The goal of financial management is to maximize the current value of the
existing stock.
5. The Agency Problem and Control of the Corporation
1. AGENCY RELATIONSHIPS
- The relationship between stockholders and management is called an agency relationship.
- agency problem: a conflict of interest between the principal and the agent.
2. MANAGEMENT GOALS
agency costs:
1. Indirect
An indirect agency cost is a lost opportunity
2. direct
Type 1: a corporate expenditure that benefits management but costs the
stockholders
the purchase of a luxurious and unneeded corporate jet would fall
under this heading
Type 2: an expense that arises from the need to monitor management
actions.
Paying outside auditors to assess the accuracy of financial
statement information is one example.
3. STAKEHOLDERS
Stakeholders are employees, customers, suppliers, and even the government all
have a financial interest in the firm.
6. Regulation
Disclosure of relevant information by corporations is intended to put all investors
on a level information playing field and reduce conflicts of interest.
1. THE
SECURITIES ACT OF 1933 AND THE
SECURITIES EXCHANGE ACT OF 1934
Illegal insider trading occurs when any person who has acquired nonpublic,
special information (i.e., inside information) buys or sells securities based upon
that information.
1. SARBANES-OXLEY
SOX prohibits personal loans from a company to its officers
