CHAPTER 1 Introduction to Corporate Finance 1

Why Study Finance? Marketing Budgets, marketing research, marketing financial products. Accounting Dual accounting and finance function, preparation of financial statements Management Strategic thinking, job performance and profitability Personal finance Budgeting, retirement planning, college planning, day- to-day cash flow issues 2

What is Corporate Finance? Corporate Finance addresses the following three questions: 1. What long-term investments should the firm take on? 2. Where will we get the long-term financing to pay for the investments? 3. How will we manage the everyday financial activities of the firm? 3

The Balance-Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible Total Value of Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Total Firm Value to Investors: 4

The Balance-Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt What long- term investments should the firm engage in? The Capital Budgeting Decision 5

The Balance-Sheet Model of the Firm How can the firm raise the money for the required investments? The Capital Structure Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt 6

The Balance-Sheet Model of 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 Assets 1 Tangible 2 Intangible Long-Term Debt 7

Forms of Business Organization Sole Proprietorship: -A business owned by one person -Keep all the profits -Unlimited liability for business debts Partnership: -A business formed by two or more individuals or entities -General partnership: has unlimited liability -Limited partnership: has limited liability Corporation: -Legal entity separate from its owners called shareholders -Shareholders have limited liability 8

* Characteristics of Businesses * 9

Hypothetical Organization Chart Chairman of the Board and Chief Executive Officer (CEO) Board of Directors President and Chief Operating Officer (COO) Vice President and Chief Financial Officer (CFO) TreasurerControllerCash Manager Capital Expenditures Credit ManagerFinancial PlanningTax Manager Financial Accounting Cost AccountingData Processing 10

Financial Management Decision Capital budgeting What long-term investments or projects should the business take on? Capital structure How should we pay for our assets? Should we use debt or equity? Working capital management How do we manage the day-to-day finances of the firm? 11

Financial Managers Shareholders want managers to make decision based upon which alternative will maximize the value of the shareholders’ investment. Maximizing the current value per share of existing stock. Operate within the law and maintain the reputation and ethical good standing of the business. The top financial manager within a firm is usually the Chief Financial Officer (CFO). -Treasurer-Oversee cash management, credit management, capital expenditure and financial planning. -Controller-Oversee taxes, cost accounting, financial accounting and data processing. 12

Role of The Financial Manager 13

Financial Markets Cash flow from firm (C) Taxes (D) Firm Government (D) Firm issues securities (A) Retained cash flows (F) Invests in assets (B) Dividends and debt payments (E) Current assets Fixed assets Financial markets Short-term debt Long-term debt Equity shares Total value of assets Total value of the firm to investors in the financial market 14

Financial Markets Financial markets enable business to raise funds, enable investors to invest in financial assets, change or trade their portfolio of financial assets, and provide a continuous evaluation or valuation of the firm’s securities. Primary market: it is used when government and corporation issue and initially sell securities. Public offering Private placement Secondary market: subsequent trading of the securities in the financial markets such as New York Stock Exchange (NYSE), American Stock Exchange. 15

Financial Markets Firms Investors Secondary Market money securities SueBob Stocks and Bonds Money Primary Market 16

End of Chapter 1 17