1. Corporate Finance Lecture 1
Dr. Solt Eszter
BME
2017

2. The Structure of the Learning Material
The financial environment of business
Time value of money, risk and return calculation,
financial institutions
Investment decisions of the company,
risk analysis
Financing decisions of the company
Capital budgeting, capital structure and the value
of the company

3. The value of the company The Balance Sheet Modell
ASSETS
LIABILITIES
Fixed Assets
Property, plant and equipment
Long term investments
Intangible assets
Current assets
Inventory
Accounts receivable
Short term investments
Cash
Owner’s equity
Long-term liabilities
long term debt
deferred income tax
Short term liabilities
accounts payable
Short term loans

4. Goal: maximizing owner’s value
Decisions
STRATEGIC DECISIONS
What specific assets should the firm invest in?
capital budgeting
How should the cash required for an investment be raised?
capital structure
Dividend policy
Goal: maximizing owner’s value

5. Goal: to ensure liquidity
Decisions
OPERATIONAL DECISIONS
How to manage cash inflows/outflows in the short run?
Current asset management
Goal: to ensure liquidity

6. Decisions INVESTMENT DECISIONS FINANCING DECISIONS
How to shape the structure of the assets?
real/financial
fixed/current
Financing the operation
Other financing (acquisition)
Equity (E)/Debt(D) ratio
Dividend policy:paying cash dividend at present or increased dividend at a later stage

7. Types of businesses Sole proprietor: No partners, no stockholders
Unlimited liability
Well-suited for a small company with an
informal business structure

8. Types of businesses Partnership : to pool money and expertise
Each partner has unlimited liability for all the
business’ debt
e.g. consulting firms, investment banks
until their financial requirements have grown too large to continue as partnerships

9. Types of businesses Corporations:
Business is owned by stockholders who are not personally liable for the business’s liabilities
Limited liability: the most a stockholder can lose is the amount invested in the stock
Separation of ownership and management
Elected board of directors

10. Advantages and drawbacks of different forms of business
Partners and sole proprietors:
Advantage: taxed only once as personal income,
smaller costs
Drawback: smaller profit potential with
unlimited liabilities
Corporations:
Advantage: larger profit potential with limited
liabilities
Drawback: as separate legal entities taxed on profits
and dividends

11. Hybrid forms of businesses
Limited partnerships:
General partner manages the business and has unlimited personal liability for the business’s debts
Limited partner has a restricted role in the management and has the liability only for the money they contribute to the business

12. Hybrid forms of businesses
LLC or LLP ( limited liability partnerships):
All partners have limited liability AND
The tax advantage of partnerships: taxed as personal income
These forms suit rather for small and medium-
sized companies

13. To maximize the value of the firm to its
The goal of the company
One approach: „Maximizing profits”
drawbacks:
Different ways of calaculation
Explicit/implicit costs
Which year’s profit?
The other approach:
To maximize the value of the firm to its
stockholders

14. Cash-flow
Net amount of cash moving into or out of business during a definite period of time
Its direction: + (in) or – (out)
Investments:
cashflow at the first period(s): - (out)
later: + (in)
Financing:
cashflow at the first period(s): + (in)
later: - (out)

15. The Principal-Agent Problem
Do managers really maximize firm value?
Reason: managers’ (agent) and owners’ interests (principal) differ
Managers’preferences:
Their own „well being”
Stability
Independence