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Chapter 1

Chapter 1. Introduction to Corporate Finance. Why Study Finance?. Marketing Budgets, marketing research, marketing financial products. Accounting Dual accounting and finance function, preparation of financial statements Management Strategic thinking, job performance and profitability

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Chapter 1

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  1. Chapter 1 Introduction to Corporate Finance

  2. Why Study Finance? • Marketing Budgets, marketing research, marketing financial products. • Accounting Dual accounting and finance function, preparation of financial statements • Management Strategic thinking, job performance and profitability • Personal finance Budgeting, retirement planning, college planning, day-to-day cash flow issues

  3. What is Corporate Finance? Corporate Finance addresses the following three questions: • What long-term investments should the firm take on? • Where will we get the long-term financing to pay for the investments? • How will we manage the everyday financial activities of the firm?

  4. 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

  5. The Balance-Sheet Model of the Firm The Capital Budgeting Decision Current Liabilities Current Assets Long-Term Debt What long-term investments should the firm engage in? Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity

  6. The Balance-Sheet Model of the Firm The Capital Structure Decision Current Liabilities Current Assets Long-Term Debt How can the firm raise the money for the required investments? Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity

  7. The Balance-Sheet Model of the Firm The Net Working Capital Investment Decision Current Assets Current Liabilities Net Working Capital Long-Term Debt Fixed Assets 1 Tangible 2 Intangible How much short-term cash flow does a company need to pay its bills? Shareholders’ Equity

  8. Forms of Business Organization • Sole Proprietorship: -A business owned by one person -Keep all the profits -Unlimited liability for business debts • Partnership: -A business formed by two or more individuals or entities -General partnership: has unlimited liability -Limited partnership: has limited liability • Corporation: -Legal entity separate from its owners called shareholders -Shareholders have limited liability

  9. Characteristics of Businesses * *

  10. Financial Accounting Capital Expenditures Financial Planning Cost Accounting Data Processing Credit Manager Cash Manager Tax Manager Board of Directors Controller Treasurer Chairman of the Board and Chief Executive Officer (CEO) Vice President and Chief Financial Officer (CFO) President and Chief Operating Officer (COO) Hypothetical Organization Chart

  11. Financial Management Decision • 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 firm?

  12. Financial Managers • Shareholders want managers to make decision based upon which alternative will maximize the value of the shareholders’ investment. • Maximizing the current value per share of existing stock. • Operate within the law and maintain the reputation and ethical good standing of the business. • The top financial manager within a firm is usually the Chief Financial Officer (CFO). -Treasurer-Oversee cash management, credit management, capital expenditure and financial planning. -Controller-Oversee taxes, cost accounting, financial accounting and data processing.

  13. Role of The Financial Manager

  14. Firm Financialmarkets Government (D) Financial Markets Firm issues securities (A) Retained cash flows (F) Investsin assets(B) Cash flowfrom firm (C) Dividends anddebt payments (E) Short-term debt Long-term debt Equity shares Current assetsFixed assets Taxes (D) Total value of the firm to investors in the financial market Total value of assets

  15. Financial Markets Financial markets enable business to raise funds, enable investors to invest in financial assets, change or trade their portfolio of financial assets, and provide a continuous evaluation or valuation of the firm’s securities. • Primary market: it is used when government and corporation issue and initially sell securities. • Public offering • Private placement • Secondary market: subsequent trading of the securities in the financial markets such as New York Stock Exchange (NYSE), American Stock Exchange.

  16. Stocks and Bonds Money Primary Market Secondary Market securities money Financial Markets Investors Firms Bob Sue

  17. End of Chapter 1

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