Corporate Finance Introduction Prof. André Farber SOLVAY BUSINESS SCHOOL UNIVERSITÉ LIBRE DE BRUXELLES

A.Farber Vietnam 2004 |2|2 Introduction Objectives for this session : 1. Who am I? What are we going to do this week? 2. What is Finance? Identify main financial decisions 3. Valuation: review

A.Farber Vietnam 2004 |3|3 Who am I? André Farber Age: 60, married, 2 boys Full professor Dean of Faculty of Social Sciences, Politics and Economics, Université Libre de Bruxelles (ULB) Education: Master of Science in Management + PhD My Fields of expertise : Finance and microeconomics Past President of SBS ( ), Past Vice-Rector of ULB Visiting professor Cornell, Chicago, Wharton Director, small regional Belgian bank and energy company

A.Farber Vietnam 2004 |4|4 What are we going to do together? Study finance! An important topic… Money at the heart of all activities Many important academic discoveries in the last 50 years Several Nobel prices –Samuelson, Modigliani, Miller, Markowitz, Sharpe, Merton, Scholes Vietnam still have some way to go relative to other countries Demand for expertise in the field very high

A.Farber Vietnam 2004 |5|5 All finance in one week ? Impossible but…. 1. other courses – Accounting (Prof. Khrouz) – Corporate Finance (Prof. Allé) – International Finance (Prof. Gallais Hamono) – Banking (Prof. de Keuleneer) 2. Textbook Written by 3 famous US professors – Steve Ross (MIT) – Randy Westerfield (U South California) – Jef Jaffey (Wharton) – Used in top Business Schools worldwide 3. you – read – think – practice – work hard

A.Farber Vietnam 2004 |6|6 Course outline Monday Business Plan & Valuation: Review Bonds and Stocks Valuation Tuesday Introduction to risk Portfolio selection Wednesday Risk and Expected Returns: Capital Asset Pricing Model Capital Structure: Basic Concepts Thursday Capital Structure: Limits to the Use of Debt Valuation for the Levered Firm Friday Forward and futures Options Saturday Real options Risky debt

A.Farber Vietnam 2004 |7|7 Don't be afraid by math… Finance is about money ($, €, dongs,…) Money is measured with numbers Math is the language for numbers I use only simple algebra Math is a just a language Finance is more important than math Vietnamese is more difficult than math (for me..)

A.Farber Vietnam 2004 |8|8 What I expect from you… 1. Ask question 2. Work out problem sets 3. Don't be afraid to make mistakes 4. Tell me about the problems in your company

A.Farber Vietnam 2004 |9|9 What is Finance? Financial decisions for households Saving and consumption How much to spend, how much to save? Investment decisions How to invest the money saved? Financing decisions How much to borrow Risk-management decisions

A.Farber Vietnam 2004 | 10 What is Finance? (2) Financial decisions for firms: 1. Investment decisions: Which REAL ASSETS to buy ? – Real assets: will generate future cash flows to the firm Intangible assets : R&D, Marketing,.. Tangible assets : Real estate, Equipments,.. Current assets: Inventories, Account receivables,.. 2. Financing decisions: Which FINANCIAL ASSET to sell ? – Financial assets: claims on future cash flows Debt: promise to repay a fixed amount Equity: residual claim

A.Farber Vietnam 2004 | 11 What characterize finance decisions? Cash flow now vs. –Cash later –Cash which is uncertain Time and uncertainty make decisions interesting but difficult! Finance is about cash flows Cash flows from operating activities Sales of goods and services, Purchases of material, Labor Cash flows from investing activities Purchase or sales of capital goods Cash flows from financing activities Dividend policy, issue of equity, management of debt

A.Farber Vietnam 2004 | 12 What is Corporate Finance? INVESTMENT DECISIONS: Which REAL ASSETS to buy ? Real assets: will generate future cash flows to the firm Intangible assets : R&D, Marketing,.. Tangible assets : Real estate, Equipments,.. Current assets: Inventories, Account receivables,.. FINANCING DECISIONS: Which FINANCIAL ASSET to sell ? Financial assets: claims on future cash flows Debt: promise to repay a fixed amount Equity: residual claim DIVIDEND DECISION: How much to return to stockholders? Introduction

A.Farber Vietnam 2004 | 13 Value Creation Hurdle rate Should be greater for riskier projects Choose financial mix Debt vs Equity To pay or not to pay Investment in project that yield a return greater than the minimum acceptable hurdle rate