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?