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Corporate Finance: Introduction

Corporate Finance: Introduction. Professor Scott Hoover Management 221. What must a financial manager understand? …must understand how to value future cash flows (time value of money) important factors …must understand how to evaluate the health of a firm

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Corporate Finance: Introduction

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  1. Corporate Finance:Introduction Professor Scott Hoover Management 221

  2. What must a financial manager understand? • …must understand how to value future cash flows (time value of money) • important factors • …must understand how to evaluate the health of a firm • ability to repay debt / ability to take on more debt • profitability • efficiency • Source of information • financial statements • press releases • news event • “expert” analyses

  3. …must understand how to forecast and plan accordingly • Why? • investment decisions (long-term decisions) • operational decisions (day-to-day decisions) • growth management • financing decisions

  4. …must understand how to identify optimal financing arrangements • instruments • leverage vs. risk • tax effects • …must understand how to evaluate potential investments • risk vs. return • relevant cash flows

  5. Firm managers • the ideal goal of firm managers • maximize income?…no • maximize profits?…no • Why not? • ignores timing • ignores risk • ignores dividend (to maximize profits, we would never pay dividends) • maximize firm value?…no • maximize shareholder wealth?…yes!

  6. Agency problems: Do firm managers always act to maximize shareholder wealth?…no • Example: GM •  agency costs • monitoring expenditures • expenditures for “preventive” structuring of the firm (so that managers have reduced incentives to act against the shareholders’ best interests • lost profits due to missed opportunities • mitigating factors • performance-based salaries • shareholder intervention (including firing firm managers) • possible takeovers

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