DAMODARAN, Aswath. Applied Corporate Finance.

Chapter 1 - The
Foundations:

The Firm: Structural Set-Up:

Existing assets: investments that a company has already made.
Growth assets: investments that are expected to be made in the future
There are two ways to finance the previously mentioned assets:
Fundraising from investors or financial institutions with
fixed payment promises to investors on the cash generated by
the assets without participation in the business operation (debt)
To offer investors a residual right over the cash is
to say, investors can obtain what is left after it is given
payment of interest with an important role in the business operations
heritage
Private companies:
Debt: bank loans
Owner's equity
Publicly traded company
Debt: bond issuance
Capital: issuance of common shares
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First Principles:
All corporate finance is based on three principles, the principle of the
investment, the principle of financing and the principle of dividends. The
principle of fixed investment where companies invest their resources, the
the principle of financing establishes the combination of funds used for
financing your investments, and the principle of dividends determines that
how much of the profits should be reinvested in the company and how much should be
return to the business owners
The principle of investment: to invest in assets and projects that generate a
higher performance than the minimum acceptable critical rate. The critical rate is higher
in riskier projects and reflects the combination of financing used:
capital or debt. The returns are measured based on cash flows
generated and the timing of these flows.
 The principle of financing: selection of a combination of
financing (equity and debt) that maximizes the value of the portfolio of
investments made and adjusting to the nature of the assets being financed

The principle of dividends: if there are no investments that exceed the rate.
criticism, refund the money to the business owners. In the case of companies
that are publicly traded, the return (dividends or share buybacks)
it will depend solely on the shareholders' preference

In corporate finance, decision-making is based on the main objective.

what it means to maximize the value of the company for the owners.

The Objective of the Firm

The objective in conventional corporate finance theory when making decisions
it is to maximize the value of the business or company.
Any decision (investment, financial or dividend) that increases the
The value of a company is considered good, while one that reduces the
the company's value is considered bad.
There is disagreement among corporate finance experts about what is the
correct objective for companies.
Some critics of corporate finance argue that companies should
to have multiple objectives that satisfy a variety of interests (e.g.,
shareholders, labor and customers
On the other hand, some would make companies focus on what they see.
such simpler and more direct objectives, such as market share or the
profitability.
The Investment Principle
The primary and main function of corporate financial theory is
provide a framework for companies to make the decision to manage
use your resources wisely.
Investment decisions do not only include those that create
revenues and profits (such as introducing a new line of products or
expand into a new market), but also those that save money
(how to build a new and more efficient distribution system).
Decisions about how much and what inventory to keep and whether to grant credit and
how much to the clients that are traditionally classified as decisions of
Working capital is ultimately also investment decisions.
Broad strategic decisions regarding which markets to enter and the
acquisitions of other companies can also be considered decisions of
investment.
Corporate finance aims to measure the performance of a decision.
proposed investment and compare it with a minimum acceptable critical rate for
decide if the project is acceptable.
 The critical rate must be set higher for riskier projects and
must reflect the combination of financing used, that is, funds from
owner (equity) or the borrowed money (debt).
The Financing Principle
All companies, no matter how large and complex they are, are ultimately financed
instance with a combination of borrowed money (debt) and equity
(capital).
- With a publicly traded company, debt can take the form of bonds and
The capital is usually common stocks.
In a private company, it is more likely that the debt is a bank loan.
and that the owner's savings represent capital.
A company will minimize its financing risk and maximize its capacity.
to use borrowed funds if you can match the cash flows of the debt with
the cash flows of the financed assets
The Dividend Principle
Every thriving company reaches a stage in its life where the flows of
Cash generated by existing investments is greater than the funds.
necessary for making good investments. At that time, this business has
to find ways to return the excess cash to the owners.
In private companies, this may imply that the owner withdraws a part.
from its funds of the company.
In a publicly traded corporation, this will involve paying dividends or
buy back shares.
Companies that choose not to return cash to owners will accumulate
cash balances that will grow over time.
Analyze whether cash should be returned to the owners of a company and to what extent.
amount is equivalent to asking (and answering) the question of how much cash
Accumulated in a company is too much cash.
Corporate Financial Decisions, Firm Value, and Equity Value
The value of a company is the present value of its expected cash flows.
discounted at a rate that reflects both the risk of the company's projects
like the combination of financing used.
Investors form expectations about future cash flows with
based on the current observed cash flows and future growth
expected, which in turn depend on the quality of the company's projects
(its investment decisions) and the amount reinvested in the business (its
dividend decisions
Financial decisions affect a company's value through the rate of
discount and, potentially, through the expected cash flows.
Some Fundamental Propositions about Corporate Finance
Corporate finance has an internal consistency that derives from its
choice of maximizing the value of the company as the sole objective function and
 its reliance on a few fundamental principles: risk has to be
rewarded, cash flows are more important than income
countable, the markets are not easily deceived, and every decision that
taking a company has an effect on its value.
Investment decisions generally affect decision-making.
financing and vice versa
Investment decisions generally affect decision-making
financing and vice versa.
It is unlikely that companies that deal with their problems in a...
they resolve them someday.
Conclusion
This chapter establishes the fundamental principles that govern finance.
corporate. The principle of investment specifies that companies invest only
in projects that generate a return that exceeds the critical rate. The principle
financing suggests that the right combination of financing for a
a company is one that maximizes the value of the investments made. The
dividend principle requires that the cash generated in excess of the
the needs of the good project should be returned to the owners.