introduction to corporate finance
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Introduction to Corporate Finance. Corporate Finance addresses the following three questions:. What long-term investments should the firm choose? How should the firm raise funds for the selected investments? How should short-term assets be managed and financed?. Total Value of Assets:.

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corporate finance addresses the following three questions
Corporate Finance addresses the following three questions:
  • What long-term investments should the firm choose?
  • How should the firm raise funds for the selected investments?
  • How should short-term assets be managed and financed?
balance sheet model of the firm

Total Value of Assets:

Total Firm Value to Investors:

Current Liabilities

Current Assets

Long-Term Debt

Fixed Assets

1 Tangible

2 Intangible

Shareholders’ Equity

Balance Sheet Model of the Firm
how a business can organize
How a Business Can Organize
  • The Sole Proprietorship
    • The single owner who also runs the business
  • The Partnership
    • A small group owns and runs the business
      • General Partnership
        • Like a sole proprietorship, but with several owners
      • Limited Partnership
        • Bears limited financial risk, and does not help run the business
  • The Corporation
    • Managers run the business; Equity owns it
      • Separates ownership and control
    • Used when you need a lot of capital
agency issues
Agency Issues
  • Shareholders own the firm
  • Managers run the firm for the shareholders
    • This is an agency relationship
      • Other Ex. Real Estate Agents, Mutual Funds
  • If they do not agree on objectives then we have a problem
historical example
Historical Example
  • When Washington was building Mt. Vernon, all everything had to come from England
  • So he would write a letter describing what he wanted and send it to London
  • London agent would then “fill order”
    • “Good enough for America”
  • Washington’s goal?
  • Agent’s goal?
what is the should managers do
What is the should managers do?
  • Maximize profit?
  • Minimize costs?
  • Maximize market share?
  • Maximize shareholder wealth?
different goals
Different Goals
  • Shareholders:
    • Want big returns on their investments
  • Managers:
    • Expensive perquisites
      • Private jet, golf memberships, cars, etc.
    • Company Survival
    • Independence
managing managers
Managing Managers
  • Managerial compensation
    • Incentives are used to align management and stockholder interests
      • Ex. Stock Options, Performance Bonuses
    • The incentives need to be structured carefully to make sure that they achieve their intended goal
  • Corporate control
    • The threat of a takeover force managers to act in stockholder interest
financial markets
Financial Markets
  • Primary Market
    • Company issues securities for the first time and keeps the money from their sale
  • Secondary Markets
    • Individuals buying and selling securities
    • Company receives no money from these transactions
    • Examples: NYSE, NASDAQ, London & Tokyo Exchange
financial markets1

Stocks and Bonds


Primary Market

Secondary Market



Financial Markets





quick quiz
Quick Quiz
  • What are the three basic questions Financial Managers must answer?
  • What are the three major forms of business organization?
  • 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?