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Introduction To Corporate Finance


Introduction To Corporate Finance Key Concepts and Skills Know the basic types of financial management decisions and the role of the financial manager Know the ... – PowerPoint PPT presentation

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Title: Introduction To Corporate Finance

  • Introduction To Corporate Finance

Key Concepts and Skills
  • Know the basic types of financial management
    decisions and the role of the financial manager
  • Know the financial implications of the different
    forms of business organization
  • Know the goal of financial management
  • Understand the conflicts of interest that can
    arise between owners and managers
  • Understand the various types of financial markets

Chapter Outline
  • Corporate Finance and the Financial Manager
  • Forms of Business Organization
  • The Goal of Financial Management
  • The Agency Problem and Control of the Corporation
  • Financial Markets and the Corporation

Corporate Finance
  • Some important questions that are answered using
  • What long-term investments should the firm take
  • Where will we get the long-term financing to pay
    for the investment?
  • How will we manage the everyday financial
    activities of the firm?

Financial Manager
  • Financial managers try to answer some or all of
    these questions
  • The top financial manager within a firm is
    usually the Chief Financial Officer (CFO)
  • Treasurer oversees cash management, credit
    management, capital expenditures, and financial
  • Controller oversees taxes, cost accounting,
    financial accounting and data processing

Financial Management Decisions
  • 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

Forms of Business Organization
  • Three major forms in the United States
  • Sole proprietorship
  • Partnership
  • General
  • Limited
  • Corporation
  • S-Corp
  • Limited liability company

Sole Proprietorship
  • Advantages
  • Easiest to start
  • Least regulated
  • Single owner keeps all the profits
  • Taxed once as personal income
  • Disadvantages
  • Limited to life of owner
  • Equity capital limited to owners personal wealth
  • Unlimited liability
  • Difficult to sell ownership interest

  • Advantages
  • Two or more owners
  • More capital available
  • Relatively easy to start
  • Income taxed once as personal income
  • Disadvantages
  • Unlimited liability
  • General partnership
  • Limited partnership
  • Partnership dissolves when one partner dies or
    wishes to sell
  • Difficult to transfer ownership

  • Advantages
  • Limited liability
  • Unlimited life
  • Separation of ownership and management
  • Transfer of ownership is easy
  • Easier to raise capital
  • Disadvantages
  • Separation of ownership and management
  • Double taxation (income taxed at the corporate
    rate and then dividends taxed at the personal

Goal Of Financial Management
  • What should be the goal of a corporation?
  • Maximize profit?
  • Minimize costs?
  • Maximize market share?
  • Maximize the current value of the companys
  • Does this mean we should do anything and
    everything to maximize owner wealth?

The Agency Problem
  • Agency relationship
  • Principal hires an agent to represent his/her
  • Stockholders (principals) hire managers (agents)
    to run the company
  • Agency problem
  • Conflict of interest between principal and agent
  • Management goals and agency costs

Managing Managers
  • Managerial compensation
  • Incentives can be used to align management and
    stockholder interests
  • The incentives need to be structured carefully to
    make sure that they achieve their goal
  • Corporate control
  • The threat of a takeover may result in better
  • Other stakeholders

Work the Web Example
  • The Internet provides a wealth of information
    about individual companies
  • One excellent site is
  • Click on the web surfer to go to the site, choose
    a company and see what information you can find!

Financial Markets
  • Cash flows to the firm
  • Primary vs. secondary markets
  • Dealer vs. auction markets
  • Listed vs. over-the-counter securities
  • NYSE

Primary Markets v/s Secondary Markets
  • Primary Markets
  • A market that issues new securities on an
    exchange. Companies, governments and other groups
    obtain financing through debt or equity based
    securities. Primary markets are facilitated by
    underwriting groups, which consist of investment
    banks that will set a beginning price range for a
    given security and then oversee its sale directly
    to investors.  Also known as "new issue market"

  • Secondary Markets
  • A market where investors purchase securities or
    assets from other investors, rather than from
    issuing companies themselves. The national
    exchanges - such as the New York Stock Exchange
    and the NASDAQ are secondary markets.

Dealer and Auction Markets
  • What Does Auction Market Mean?A market in which
    buyers enter competitive bids and sellers enter
    competitive offers at the same time. The price a
    stock is traded represents the highest price that
    a buyer is willing to pay and the lowest price
    that a seller is willing to sell at. Matching
    bids and offers are then paired together and the
    orders are executed. 

An example of Auction Market
  • The New York Stock Exchange (NYSE) is an example
    of an auction market. Auction markets differ from
    over the counter where trades are negotiated. For
    example, 4 buyers want to buy a share of XYZ and
    make the following bids 10.00, 10.02, 10.03 and
    10.06. Conversely, there are 4 sellers that
    desire to sell XYZ and they submitted offers to
    sell their shares at the following prices
    10.06, 10.09, 10.12 and 10.13. In this
    scenario, the individuals that made bids/offers
    for XYZ at 10.06 will have their orders
    executed. All remaining orders will
    not immediately be executed and the current price
    of XYZ will then be 10.06.

Dealer Markets
  • What Does Dealer Market Mean?
  • A market where dealers are assigned for specific
    securities. The dealers create liquid markets by
    purchasing and selling against personal

An example of Dealer Market
  • An example of Dealer MarketUnlike auction
    markets, the benefit of this type of market is
    the rapid access that investors have to buyers
    and sellers of a particular security. The best
    example of a dealer market is the Nasdaq.

Listed v/s Over-the-Counter Securities
  • OTC Securities
  • A security traded in some context other than on a
    formal exchange such as the NYSE, TSX, AMEX, etc.
    The phrase "over-the-counter" can be used to
    refer to stocks that trade via a dealer network
    as opposed to on a centralized exchange.
  • It also refers to debt securities and other
    financial instruments such as derivatives, which
    are traded through a dealer network.

A Quick note on Nasdaq
  • Although Nasdaq operates as a dealer
    network, Nasdaq stocks are generally not
    classified as OTC because the Nasdaq is
    considered a stock exchange. As such, OTC stocks
    are generally unlisted stocks which trade on the
    Over the Counter Bulletin Board (OTCBB) or on the
    pink sheets.
  • Be very wary of some OTC stocks, however the
    OTCBB stocks are either penny stocks or are
    offered by companies with bad credit records.

Quick Quiz
  • What are the three types of financial management
    decisions and what questions are they designed to
  • What are the three major forms of business
  • What is the goal of financial management?
  • What are agency problems and why do they exist
    within a corporation?
  • What is the difference between a primary market
    and a secondary market?

  • End of Chapter
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