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What is Corporate Finance - PowerPoint PPT Presentation


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What do you read in WSJ? Stock Market Trading and insider trading Daily trading volatility Mutual fund scandals late trading and market timing fees IPO allocations Google Frank Quattrone Executive Compensations Tyco Corporate Governance and Earnings Management Enron, Worldcom

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Presentation Transcript
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What do you read in WSJ?

  • Stock Market

    • Trading and insider trading

    • Daily trading volatility

  • Mutual fund scandals

    • late trading and market timing

    • fees

  • IPO allocations

    • Google

    • Frank Quattrone

  • Executive Compensations

    • Tyco

  • Corporate Governance and Earnings Management

    • Enron, Worldcom

Introduction – MBA504


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Introduction – MBA504


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Investment

  • What kinds of investment tools we have?

  • How to issue new securities?

  • Security Markets

  • Listing and listing requirements

  • What do Investment banks do?

    • Goldman Sachs, Merrill Lynch, JPMorgan, Lehman Brother, Saloman Smith Barney, Morgan Stanley

    • Investment banking (underwriting): Underwrites IPOs, SEOs, places private equity ...

    • Brokage Service: execute security transaction, offers M&A advisory services ...

    • Asset management

Introduction – MBA504


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Financial Institutions

  • Commercial Banks

  • Savings institutions

  • credit unions

  • mutual funds

  • insurance companies

  • pension funds

Introduction – MBA504


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International Finance

  • Foreign Exchange Risk

  • Political Risk

  • Terms like LIBOR, EURO, Eurodollar

  • What would be the impact on Japanese products if Yen Strengthens against Dollar?

Introduction – MBA504


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Introduction – MBA504


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What is Corporate Finance?

Corporate Finance addresses the following three questions:

  • What long-term investments should the firm engage in?

  • How can the firm raise the money for the required investments?

  • How much short-term cash flow does a company need to pay its bills?

Introduction – MBA504


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Total Value of Assets:

Total Firm Value to Investors:

Current Liabilities

Current Assets

Long-Term Debt

Fixed Assets

1 Tangible

2 Intangible

Shareholders’ Equity

The Balance-Sheet Model of the Firm

What long-term investments should the firm engage in?

Introduction – MBA504


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Total Value of Assets:

Total Firm Value to Investors:

Current Liabilities

Current Assets

Long-Term Debt

Fixed Assets

1 Tangible

2 Intangible

Shareholders’ Equity

The Balance-Sheet Model of the Firm

How can the firm raise the money for the required investments?

Introduction – MBA504


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Total Value of Assets:

Total Firm Value to Investors:

Current Liabilities

Current Assets

Long-Term Debt

Fixed Assets

1 Tangible

2 Intangible

Shareholders’ Equity

The Balance-Sheet Model of the Firm

Net working capital

Introduction – MBA504


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25% Debt

70% Debt

30% Equity

75% Equity

Capital Structure

The value of the firm can be thought of as a pie.

50% Debt

The goal of the manager is to increase the size of the pie.

50% Equity

The Capital Structure decision can be viewed as how best to slice up a the pie.

If how you slice the pie affects the size of the pie, then the capital structure decision matters.

Introduction – MBA504


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The Financial Manager

To create value, the financial manager should:

  • Try to make smart investment decisions.

  • Try to make smart financing decisions.

Introduction – MBA504


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The Corporate Firm

  • The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.

  • However, businesses can take other forms.

Introduction – MBA504


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Organization Chart

Introduction – MBA504


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Forms of Business Organization

  • The Sole Proprietorship

  • The Partnership

    • General Partnership

    • Limited Partnership

  • The Corporation

  • Advantages and Disadvantages

    • Liquidity and Marketability of Ownership

    • Control

    • Liability

    • Continuity of Existence

    • Tax Considerations

Introduction – MBA504


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Goals of the Corporate Firm

  • The traditional answer is that the managers of the corporation are obliged to make efforts to maximize shareholder wealth.

Introduction – MBA504


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Managerial Goals

  • Managerial goals may be different from shareholder goals

    • Expensive perquisites

    • Survival

    • Independence

  • Increased growth and size are not necessarily the same thing as increased shareholder wealth.

Introduction – MBA504


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Separation of Ownership and Control

Board of Directors

Management

Debtholders

Shareholders

Debt

Assets

Equity

Introduction – MBA504


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Do Shareholders Control Managerial Behavior?

  • Shareholders vote for the board of directors, who in turn hire the management team.

  • Contracts can be carefully constructed to be incentive compatible.

  • There is a market for managerial talent—this may provide market discipline to the managers—they can be replaced.

  • If the managers fail to maximize share price, they may be replaced in a hostile takeover.

Introduction – MBA504


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Financial Markets

  • Primary Market

    • When a corporation issues securities, cash flows from investors to the firm.

    • Usually an underwriter is involved

  • Secondary Markets

    • Involve the sale of “used” securities from one investor to another.

    • Securities may be exchange traded or trade over-the-counter in a dealer market.

Introduction – MBA504


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