1. FINANCIAL ANALYSIS AND FORECASTING 52-251-A2003 FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 1

2. TRANSPARENCY ACETATES to accompany FUNDAMENTALS OF CORPORATE FINANCE Fourth Canadian Edition Stephen A. Ross Randolph W. Westerfield Bradford D. Jordan Gordon S. Roberts Prepared by: Thomas J. Cottrell Modified by: Carlos Vecino HEC-Montreal Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson,Ltd.

3. Part I:Overview of Corporate Finance Part II:Financial Statements and Long-Term Financial Planning Part III:Valuation of Future Cash Flows Part IV:Capital Budgeting Part V:Risk and Return Part VI:Cost of Capital and Long-Term Financial Policy Part VII:Short-Term Financial Planning and Management Part VIII:Topics in Corporate Finance Part IX:Derivative Securities and Corporate Finance Outline of the Text

4. Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. Chapter 1Introduction to Corporate Finance Chapter 2Financial Statements, Taxes, and Cash Flow Chapter 3Working with Financial Statements Chapter 4Long-Term Financial Planning and Corporate Growth Chapter 5Introduction to Valuation: The Time Value of Money Chapter 6Discounted Cash Flow Valuation Chapter 7Interest Rates and Bond Valuation Chapter 8Stock Valuation Chapter 9Net Present Value and Other Investment Criteria Chapter 10Making Capital Investment Decisions Chapter 11Project Analysis and Evaluation Chapter 12Some Lessons from Capital Market History Chapter 13Return, Risk, and the Security Market Line Chapter 14Cost of Capital Table of Contents

5. Chapter 15Raising Capital Chapter 16Financial Leverage and Capital Structure Policy Chapter 17Dividends and Dividend Policy Chapter 18Short-Term Finance and Planning Chapter 19Cash and Liquidity Management Chapter 20Credit and Inventory Management Chapter 21International Corporate Finance Chapter 22Leasing Chapter 23Mergers and Acquisitions Chapter 24Risk Management: An Introduction to Financial Engineering Chapter 25Options and Corporate Securities Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. Table of Contents (continued)

6. T1.1 Chapter Outline Chapter 1 Introduction to Corporate Finance Chapter Organization 1.1Corporate Finance and the Financial Manager 1.2Forms of Business Organization 1.3The Goal of Financial Management 1.4The Agency Problem and Control of the Corporation 1.5Financial Markets and the Corporation 1.6Financial Institutions Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd.

7. T1.1 Chapter Outline Chapter 1 Introduction to Corporate Finance Chapter Organization (cont’d) 1.7Trends in Financial Markets and Financial Management 1.8Outline of the Text 1.9Summary and Conclusions Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd.

8. T1.2 The Four Basic Areas of Finance The Four Basic Areas of Finance Corporate Finance Investments Financial Institutions International Finance Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd.

9. T1.2 The Four Basic Areas of Finance - Corporate Finance Corporate Finance Long-term investments (What long term investment should we take on?)  Capital Budgeting Long-term financing (Where, how, from whom)  Capital Structure Short-term financing (How to manage everyday financial and operating activities)  Working Capital Management Risk management (hedging exposure to fluctuations)  Derivative securities Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd.

10. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 10 T1.3 A Simplified Organizational Chart (Figure 1.1)

11. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 11 T1.4 Forms of Business Organization Organizational Forms  Sole Proprietorship (The owner has unlimited liability)  Partnership General Partnership (All partners share in gains and losses, All bear unlimited liability) Limited Partnership (One or more general partners have unlimited liability – The limited partners do not actively run the business, their liability is limited to their contribution to the partnership)  Corporation Limited Liability Company

12. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 12 T1.5 International Corporations (Table 1.1) Bayerische GermanyAktiengesellschaftCorporation Moterenwerke AG Dornier GmBHGermanyGesellschaft mitLimited liability co. Beschrankter Haftung Rolls-Royce PLCUnited KingdomPublic limited companyPublic limited co. Shell UK Ltd.United KingdomLimitedCorporation Unilever NVNetherlandsNaamloze VennootschapJoint stock co. Fiat SpAItalySocieta per AzioniJoint stock co. Volvo ABSwedenAktiebolagJoint stock co Banco Santander C H, S.A. SpainSociedad AnónimaJoint stock co Peugot SAFranceSociété AnonymeJoint stock co. Type of Company Company Country of Origin In Original Language Translated

13. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 13 T1.6 The Goal of Financial Management What are firm decision-makers hired to do? “General Motors is not in the business of makingautomobiles. General Motors is in the business of making money.”--Alfred P. Sloan Possible goals of the firm ? (Stakeholder vs. Shareholder) See: Value Maximization, Stakeholder Theory, and the Corporate Objective Function ( MICHAEL C. JENSEN Harvard Business School; The Monitor Company; Social Science Electronic Publishing (SSEP), Inc.) http://papers.ssrn.com/abstract=220671 MICHAEL C. JENSEN http://papers.ssrn.com/abstract=220671 Three equivalent goals of financial management: Maximize shareholder wealth Maximize share price Maximize firm value

14. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 14 T1.7 The Agency Problem The Agency Problem and Control of the Firm Agency Relationships and Management Goals Do managers Act in the Shareholders’ interests? Agency costs Direct agency costs Indirect agency costs Mechanisms to ensure Managers are acting in shareholders’ interest Managerial compensationProxy Contest Board of directorsInstitutional Investors Takeover activity

15. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 15 T1.8 Financial Markets Financial Markets What is the role of financial markets in corporate finance? Cash flows to and from the firm Money markets and capital markets Primary versus Secondary markets How do financial markets benefit society?

16. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 16 T1.9 Cash Flows Between the Firm and the Financial Markets (Figure 1.2)

17. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 17 T1.10 Financial Institutions Banks are Intermediaries Intermediaries provide scale economies in services This allows them to earn income on services provided: Earn interest on the spread between loans and borrowings Service fees (e.g. bankers acceptance, stamping fee) Direct finance - services to clients without holding funds The 10 largest Canadian financial institutions are: 6 chartered banks, 2 financial holding companies, 1 credit union, 1 pension fund (see Table 1.4 in the text)

18. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 18 T1.12 Chapter 1 Quick Quiz Quick Quiz 1. Who performs the financial management function in the typical corporation? 2. What are the major advantages and disadvantages of the corporate form of organization? 3. Why is shareholder wealth maximization a more appropriate goal than profit maximization?

19. FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd Slide 19 T1.12 Chapter 1 Quick Quiz Quick Quiz 1. Who performs the financial management function in the typical corporation? Treasurer, CFO, Vice-President of Finance 2. What are the major advantages and disadvantages of the corporate form of organization? Pros: limited liability, raising capital, unlimited life, ease of ownership transfer Cons: expensive to form, double taxation, agency problems 3. Why is shareholder wealth maximization a more appropriate goal than profit maximization? It takes time and risk into account