1. The Framework of Finance
MBA 2015 week 1

2. What is Finance?
Finance is: “Any decision in a business/organization that involves Money…”
“Everything else you do in this MBA program is in favor of Finance”

3. The Objective in Finance:
“if you don’t know where you are going,
it does not matter how you get there”
(Alice in Wonderland)

4. Fundamental Principal of Finance
Maximize Firm Value
Hurdle Rate reflect Risk of Investment
Return reflect size and timing of Cash Flows
Optimal Mix of Debt/Equity Maximizes Value
The right kind of debt matches the Assets
©℗How much cash to return depend on Investment Opportunities
Do your shareholders prefer Dividends or Buy Backs?
Pay Out Decision
Investment Decision
Financing Decision
If you don’t have enough Investments that have a return>hurdle rate; return the cash to the owners
Invest in Assets with Return> Hurdle Rate
Find the right kind of debt and the right relation Debt/equity

5. General Steel Holdings
TEAMS & Companies
Groups
Name ID
Company 1
刘其远
Wal Mart
WMT
孙宇龙 汪芬
张璐裕 2
张君萍
Estee Lauder EL
程伟丽 肖霞
董淳宇 谢杨 3 徐伟
Dow Chemicals
DOW
王晓辉
翁吉顺 李颖
杨易杰 4 张婷
General Steel Holdings
GSI
谢邓超
张传慧
丁连滨
李国军 5
朱剑颖
E bay
EBAY 薛莲
薛栋敏 吴月 崔月 6 俞波
Tesla Motors
TSLA 洪杰
袁吉贵
张赟嫣 朱慧 7 郑宇
Baidu
BIDU
SEC FILINGS?
张其慧
钟志强
赵迟弦

6. Objective Function (theory)
Stock Holders
Hire and Fire Managers
Maximize Stockholders Wealth
Reveal information honestly and on time
Markets are efficient
Lend Money
No Social Costs
Debt Holders
MANAGERS
Society
Protect Debt Holder interests
Costs can be traced to the firm
Financial Markets

7. What is the reality? MANAGERS
Stock Holders
Stockholders have little control over Managers
Managers put their own interest above stockholders
Delay bad news or provide misleading information
Markets make mistakes and are not efficient
Lend Money
Significant Social Costs
Debt Holders
MANAGERS
Society
Debt holders can get ripped off…
Some costs can not be traced to the firm
Financial Markets

8. So what do we see nowadays ?
Stock Holders
More Activists and Hostile take-overs
Managers of poorly run firms are put on notice
Firms are punished for misleading markets
Investors and Analysts become more skeptical
Lend Money
Corporate Good Citizen constraints
Debt Holders
MANAGERS
Society
Protect themselves (covenants)
More laws…
Financial Markets

9. Maximize Firm Value CORP. BALANCE SHEET date:……….. ASSETS (debit)
Assets in Place
Existing Investments
Generate Cash Flow today (Fixed assets and Working Capital)
Debt
Fixed Claims on Cash flows (little/no role in Management
Fixed Maturity
Tax Deductible
Growth Assets
Expected Value that will be created by future Investments
Equity
Residual Claim on Cash flows
Significant role in Management
Perpetual Live
CORP. BALANCE SHEET date:………..
ASSETS (debit)
LIABILITIES (credit)

10. Google Inc. CORP. BALANCE SHEET date:……….. ASSETS (debit)
Assets in Place
Existing Investments
Generate Cash Flow today (Fixed assets and Working Capital)
Debt
Fixed Claims on Cash flows (little/no role in Management
Fixed Maturity
Tax Deductible
Growth Assets
Expected Value that will be created by future Investments
Equity
Residual Claim on Cash flows
Significant role in Management
Perpetual Live
CORP. BALANCE SHEET date:………..
ASSETS (debit)
LIABILITIES (credit)
Total Assets in Place:
58 B USD (31%)
Total Debt B USD
Total Growth Assets:
130 B USD (69%)
Total Equity B USD (100%)

11. Walt Disney Inc. CORP. BALANCE SHEET date:……….. ASSETS (debit)
Assets in Place
Existing Investments
Generate Cash Flow today (Fixed assets and Working Capital)
Debt
Fixed Claims on Cash flows (little/no role in Management
Fixed Maturity
Tax Deductible
Growth Assets
Expected Value that will be created by future Investments
Equity
Residual Claim on Cash flows
Significant role in Management
Perpetual Live
CORP. BALANCE SHEET date:………..
ASSETS (debit)
LIABILITIES (credit)
Total Assets in Place:
69 B USD (75%)
Total Debt B USD (33%)
Total Growth Assets:
23 B USD (25%)
Total Equity B USD
(67%)

12. AT&T Inc. CORP. BALANCE SHEET date:……….. ASSETS (debit)
Assets in Place
Existing Investments
Generate Cash Flow today (Fixed assets and Working Capital)
Debt
Fixed Claims on Cash flows (little/no role in Management
Fixed Maturity
Tax Deductible
Growth Assets
Expected Value that will be created by future Investments
Equity
Residual Claim on Cash flows
Significant role in Management
Perpetual Live
CORP. BALANCE SHEET date:………..
ASSETS (debit)
LIABILITIES (credit)
Total Assets in Place:
269 B USD (91%)
Total Debt B USD (41%)
Total Growth Assets:
25 B USD (9%)
Total Equity B USD
(59%)

13. Facebook (estimates) CORP. BALANCE SHEET date:……….. ASSETS (debit)
Assets in Place
Existing Investments
Generate Cash Flow today (Fixed assets and Working Capital)
Debt
Fixed Claims on Cash flows (little/no role in Management
Fixed Maturity
Tax Deductible
Growth Assets
Expected Value that will be created by future Investments
Equity
Residual Claim on Cash flows
Significant role in Management
Perpetual Live
CORP. BALANCE SHEET date:………..
ASSETS (debit)
LIABILITIES (credit)
Total Assets in Place:
<1 B USD (2%)
Total Debt B USD (0%)
Total Growth Assets:
>49 B USD (98%)
Total Equity B USD
(100%)

14. Worst Board…2011 Carli Fiorina bought Compaq….
The Board fired her in 2005.
Mark Herd took over in 2006.
The Board fired him in 2010 (Sexual Harassment)
The BoD appointed Leo Apotheker (who?)
An executive of SAP.
He announced HP will become another IBM and sell of it’s PC business.
He acquired Autonomy (UK Software)
Launched Web OS (pulled the plug 2 months later)
Developed and market a HP tablet (and pulled the plug 3 months later)
He is expected to be fired this year…
Loyal customers are doubting what is going on in HP and buying their hardware somewhere else…” HP is lost”…..
Apoth….who?
“ he was the best candidate for the job out of a group of very unqualified candidates”
Two thirds of the BoD members voted for him without even having met him!

15. Or is it Yahoo! ?
Refused a golden offer from Microsoft ($33 per share only 2 years ago)
Flip flopped CEO’s on it’s BoD
Ousted Carol Bartz as CEO
Who then opened up in Fortune (“Yahoo is the worst BoD”)
And was suspended immediately…
Yahoo! holding back $ 10 Mln. severance pay….
THE directors of Yahoo! were “so spooked by being cast as the worst board in the country” that they fired Carol Bartz as chief executive “to show that they’re not the doofuses that they are.”
Bartz never was the turnaround chief that the Yahoo board had wanted. Though she slashed costs and improved profit margins, she failed to improve revenue growth at a critical time when Yahoo has lost eyeballs and ad dollars to Google (GOOG) and Facebook. "They want revenue growth," says Bartz about the Yahoo board, "even though they were told that we would not have revenue growth until 2012."

16. Worst BoD

17. In class assignment on your S&P500 Company Calpers (California) test of independent Boards
Are a majority of the Directors outside directors?
Is the Chairman of the BoD independent and not the CEO?
Are the compensation and audit committees composed of entirely outsiders?
Disney failed to score on any of these….