13/09/2021

Module Objectives

• To give you the big picture of how firms do their

business to survive and to grow.

Introduction to Corporate Finance • To give you the capacity to understand the theory
and apply, to real-world situations, how firms
make their business decisions.
Dr Trung Hai Le, FRM

Module organizer Textbook

Dr Trung Hai Le, FRM
Ross / Westerfield / Jaffe / Jordan (2016)
Deputy Head, Banking Business Department, Banking Faculty
Corporate Finance
PhD in Finance (University of East Anglia, Uk), MSc in Banking
and Finacne (University of Leicester, Uk), Bachelor in Banking
11th Edition, McGraw-Hill
and Finance (Banking Academy). ISBN: 978-0-07-786175-9
FRM (Financial Risk Manager – GARP) holder
• Do I need the textbook?
Email: [email protected] Yes, you need to study the
Office location: Room 504, A2 Building, BAV relevant chapters as instructed
in each lecture. All exercise
Office hours: Thursdays 14:00 – 16:00 and questions will be there as
well
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In a nutshell… Frequently Asked Questions (FAQs)

• The module consists of 16 lectures, 4 seminars • Do I need the textbook?
and 2 labs Yes, you need to study the relevant chapters as
instructed in each lecture. All exercise and
• In the lectures we will discuss the material questions will be there as well
presented in chapters 1 – 2, 4-6, 11, 13, 16, 17,
19 from the textbook • What else do I need?
Please having your calculator with you all the
• In the seminars we will revisit the material time in this class.
covered in the lectures through exercises
• Do I have bonus points?
• In the labs, we will work on case studies and Yes, active participation in each lecture will be
apply analytical skills (Excel) to solve practical rewarded by bonus points. The bonus point(s) will
problem. Have you used Microsoft Excel before? be directly added to your participation and mid-
term test marks.
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Grading Frequently Asked Questions (FAQs)

• Participation – 10% Any remaining questions??

• Mid-term test (Individual) – 20%

• Project-based Groupwork – 20%
• Exam – 50%

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Timeline for handouts Module Expectations (2)

• Lecture handouts will be available on Classroom From you
by noon the day prior to the lecture.

• Seminar will be available on Classroom two days

before the Seminar – Please work on the
exercises in advance.

• Detailed seminar solutions will be available on

Blackboard after it has run for all groups. Friday
on the week of the seminar.
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Module Expectations (1) Outline for Today

From me 1. What is corporate finance?
• Attend all lectures, seminars and labs! Class will
start on time. Attendance will be checked at any 2. The big picture of corporate finance.
class.
3. What is the financial goals of firms?
• Study the materials from the textbook as
instructed! 4. What is a corporation?
• Check regularly the Classroom for 5. Agency issues in firms.
announcements and material added!

• No phones, PLEASE!!!
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How a business works? The accounting view of a firm

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What is corporate finance? The financial view of a firm

‘Every decision made in a business has financial
implications, and any decision that involves the
use of money is a corporate finance decision.
Defined broadly, everything that a business does
fits under the rubric of corporate finance. ’
Aswath Damodaran, Stern School of Business, NYU
http://pages.stern.nyu.edu/~adamodar/

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The importance of cash flow

Corporate Finance Decisions

Figure 1.3, pp8, RJW 2016

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The importance of cash flow

The CityU Ltd. starts a business in making and selling shoes. At the end of the
Possible goals of financial management
year, it sold $1,000,000 worth of shoes. The company had paid to their suppliers
$700,000 at the beginning of the year for materials and $200,000 SG&A costs, all
in cash. Unfortunately it has yet to collect from the customer to whom the shoes • Survive
were sold.
• Beat the competition
The CityU Ltd. Accounting view The CityU Ltd. Financial view – Year
– Year Ended December 31 Ended December 31 • Maximize sales
Sales $1,000,000 Cash inflow $0
Cash outflow -$900,000
• Maximize net income
- Costs -$900,000
Profit $100,000 -$900,000 • Maximize market share
Value creation depends on cash flows. For CityU, value is created or not, • Minimize costs
depending on whether (Risk) and when (timing) they actually receives $1,000,000
• Maximize the value of (stock) shares
What we concern in corporate finance is cash
flows – how much, when and how uncertainty?
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Why stock price? What is the goal of Apple?

‘We are really pleased with
our revenues but our goal
 Stock price is easily observable and constantly updated isn't to make money. It
sounds a little flippant, but it's
 If investors are rational (are they?), stock prices reflect the truth. Our goal and
the wisdom of decisions, short term and long term,
what makes us excited is to
make great products. If we
Sir Jonathan Ive
instantaneously. are successful people will like Chief Design Officer
them and if we are Apple Inc.

 The stockholdes in a firm are the residual owners. They operationally competent,
we will make money.’
are entitled for what is left after all other stakeholderss Wired.co.uk, 30 July 2012
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Maximizing Stock Prices is too “narrow” an What is the goal of McDonald’s?

objective: A preliminary response
‘McDonald's brand mission is to be our
 Maximizing stock price is not incompatible with meeting employee customers' favorite place and way to eat and
needs/objectives. In particular: drink. Our worldwide operations are aligned
 Employees are often stockholders in many firms around a global strategy called the Plan to Win,
 Firms that maximize stock price generally are profitable firms that can
which center on an exceptional customer
afford to treat employees well.
experience – People, Products, Place, Price and
 Maximizing stock price does not mean that customers are not
Promotion. We are committed to continuously
critical to success. In most businesses, keeping customers happy is
improving our operations and enhancing our
the route to stock price maximization.
customers' experience.’
 Maximizing stock price does not imply that a company has to be a
http://www.aboutmcdonalds.com/mcd/our_company/mission_and_values.html
social outlaw.
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Who takes financial decisions? Corporate governance

Separation of ownership & management

Firm’s Financial CFO COO ... CTO
Investors
operations/ Manager
investments (Chief Financial
Officer, Financial
Treasurer, assets Appointed &
Real assets Controller) monitored by Board Chief Executive Officer

1. Raises cash from investors

Elected by shareholders Board of Directors
2. Invests cash in the firm
3. Cash is generated by operations
4. Reinvests cash in the firm and/or returns to investors Owners of the firm Shareholders
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What is a corporation? It can get complicated...

A corporation is a business organized as a legal
entity distinct from its owners

http://www.ritholtz.com
• Confers limited liability

• Can be public or private and in both cases can be

closely held

• Identified by many names: Inc. (USA), Plc. (UK),

SA (France), GmbH (Germany), S.p.A. (Italy) etc.
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Agency issues Agency cost

• Direct costs: (1) unnecessary expenses, such
Suppose you hire someone to sell your house and you
decide to hide an agent to help you to sell. What would as a corporate jet, and (2) monitoring costs.
happen, if:
- You decide to pay the agent a flat fee when he or she • Indirect costs. For example, a manager may
sells the house.
- You offer a commission of, say, 10 percent of the sales choose not to take on the optimal investment.
price instead of a flat fee
She/he may prefer a less risky project so that
she/he has a higher probability keeping
her/his tenure.

Agency issues What to do?

Is it realistic to expect managers to always act on the best
A combination of ‘measures’ is required to reduce
interests of the shareholders?
• Agency relationship:
the principal-agent problem in corporations:
– Principals (citizens) hire an agent (the president) to → Diverse board of directors
represent their interest. → Appropriate compensation plans
– Principles (stockholders) hire agents (managers) to run the → Specialist monitoring
company.
→ Threat of a potential takeover
• Principle-Agent Problem:
– Conflict of interest between principals and agents.
– The source of agency problems is the separation of
(owners’) control and management.

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Questions?

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