1. Corporate Finance Lecture 1

2. Topics Change of schedule: Change of schedule: –Fridays from 18:30 – 19:50 to 11:00 – 12:20 Practical information about this course Practical information about this course The firm and the financial managers The firm and the financial managers

3. About the Course Objective: to introduce basic principles of finance and practical tools for financial decisions. Objective: to introduce basic principles of finance and practical tools for financial decisions. Text book: Corporate Finance, Ross, Westerfield and Jaffe, 7th edition Text book: Corporate Finance, Ross, Westerfield and Jaffe, 7th edition Syllabus and notes online: Syllabus and notes online: http://docentes.fe.unl.pt/~qdai/teaching/master/ corpfin2009.html Office hour: Tuesday 16:00 to 17:00, Room 352 Office hour: Tuesday 16:00 to 17:00, Room 352 Email: qinglei.dai@fe.unl.pt Email: qinglei.dai@fe.unl.ptqinglei.dai@fe.unl.pt

4. Evaluation Class participation (10%) Class participation (10%) Exercises and Case studies (40%) Exercises and Case studies (40%) –2 cases and three online exercises –Moodle password: finance Case study group: Case study group: –3-4 students per group. –The groups have to be registered by April 14 with TA. Anyone who fails to register has to do the case study ALONE. Final exam (50%) Final exam (50%) –May 19

5. The firm and the financial managers The firm The firm What do we learn from this course? What do we learn from this course? –The balance sheet model of corporate finance The role of a financial manager The role of a financial manager –What is a financial manager –The role

6. 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

7. Financial Manager Firm's operations Investors (1) Cash raised from investors (1) (2) Cash invested in firm (2) (3) Cash generated by operations (3) (4a) Cash reinvested (4a) (4b) Cash returned to investors (4b) The Role of The Financial Manager Real assets

8. Goals of the firm Shareholders desire wealth maximization Shareholders desire wealth maximization Do managers maximize shareholder wealth? Do managers maximize shareholder wealth? “Agency Problems” “Agency Problems”

9. Goals of the firm Agency Problem Solutions 1 - Compensation plans 2 - Board of Directors 3 - Takeovers 4 - Specialist Monitoring 5 - Auditors

10. The Firm Purpose of the firm: value creation Purpose of the firm: value creation –Does value maximization justify unethical behavior Enron Enron More suggestions? More suggestions? Two aspects of corporate finance: Two aspects of corporate finance: –Raise funding –Investment Balance sheet model of corporate finance Balance sheet model of corporate finance

11. The Balance-Sheet Current Assets Fixed Assets 1 Tangible 2 Intangible Total Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Liabilities and Equity

12. The Balance-Sheet Current Assets Fixed Assets 1 Tangible 2 Intangible Total Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Liabilities and Equity What long- term investments should the firm engage in?

13. The Role of The Financial Manager Capital Budgeting Decision Capital Budgeting Decision –also called the Investment Decision Tangible Assets Portugal Telecom @ 3,585 million Euros Intangible Assets Coca-Cola brand name

15. The Balance-Sheet Current Assets Fixed Assets 1 Tangible 2 Intangible Total Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Liabilities and Equity How can the firm raise the money for the required investments? 1. Financing Decision 2. Capital Structure

16. The Balance-Sheet Current Assets Fixed Assets 1 Tangible 2 Intangible Total Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Liabilities and Equity Net working capital management