MGF301 Fall 1998Vigdis BoassonSUNY at Buffalovwb@acsu.buffalo.edu FUNDAMENTALS OFCORPORATE FINANCE
Table of Contents Chapter 1 Introduction to Corporate Finance Chapter 2 Financial Statements, Taxes, and Cash Flow Chapter 3 Working with Financial Statements Chapter 4 Long-Term Financial Planning and Growth Chapter 5 Introduction to Valuation: The Time Value of Money Chapter 6 Discounted Cash Flow Valuation Chapter 7 Interest Rates and Bond Valuation Chapter 8 Stock Valuation Chapter 9 Net Present Value and Other Investment Criteria Chapter 10 Making Capital Investment Decisions Chapter 11 Project Analysis and Evaluation Chapter 12 Some Lessons from Capital Market History
Table of Contents (continued) Chapter 13 Return, Risk, and the Security Market Line Chapter 14 Cost of Capital Chapter 15 Raising Capital Chapter 16 Financial Leverage and Capital Structure Policy Chapter 17 Dividends and Dividend Policy Chapter 18 Short-Term Finance and Planning Chapter 19 Cash and Liquidity Management Chapter 20 Credit and Inventory Management Chapter 21 International Corporate Finance
1.1 Chapter Outline Chapter 1Introduction to Corporate Finance • 1.1 Corporate Finance and the Financial Manager • 1.2 The Corporate Form of Business Organization • 1.3 The Goal of Financial Management • 1.4 The Agency Problem and Control of the Corporation • 1.5 Financial Markets and the Corporation • 1.6 Summary and Conclusions
1.1 What is Corporate Finance? • 1. What long-term investments should we make? • 2. Where will we get the funds to pay for our investment? • 3. How will we collect from customers to pay our bills?
Board of Directors Chairman of the Board and Chief Executive Officer (CEO) President and Chief Operations Officer (COO) Vice President Marketing Vice President Finance (CFO) Vice President Production Controller Treasurer Cost Accounting Manager Cash Manager Tax Manager Credit Manager Financial Accounting Manager Data Processing Manager Financial Planning Capital Expenditures 1.2 A Simplified Organizational Chart (Figure 1.1)
1.3 Forms of Organization • Sole Proprietorship A business owned by a single individual. The owner keeps all the profits but has unlimited liability for business debts. • Partnership A Business formed by two or more individuals or entities. General Partnership / Limited Partnership • Corporation A business created as a distinct legal entity composed of one or more individuals or entities Limited Liability Company
1.4 Limited Liability Companies Limited Liability Companies (LLCs) • Created by state law • Governed by the “operating agreement” (rather than articles of incorporation) • Ownership interests - may or may not be evidenced by ownership shares • Legal and Economic Considerations LLC “members” (i.e., owners) have limited liability LLC is treated as a partnership for tax purposes
1.5 The Goal of Financial Management The Goal of Financial Management • The goal of financial management is to maximize the current value per share of the existing stock. • Three equivalent goals of financial management: Maximize shareholder wealth Maximize share price Maximize firm value
1.6 The Agency Problem The Agency Problem • The agency relationship The relationship between stockholders and management. • Will managers work in the shareholders’ best interests? Agency costs Direct agency costs:Management compensation Indirect agency costs: monitoring managers and suboptimal decisions.
1.7 Financial Markets • Cash flows to and from the firm A firm issues securities to realize cash for investment in assets. The operating cash flows generated from the investment in assets allows for payment of taxes, reinvestment in new assets, and payment of interest and dividends to the investors in the firm’s securities. The financial markets bring the buyers and sellers of debt and equity securities together. • Primary markets:Public offers, SEC registration, underwriters. • secondary markets: Stock exchange (NYSE,AMEX), OTC, Nasdaq.
Total Value of the Firm to Investors in the Financial Markets Total Value of Firm’s Assets B. Firm invests in assets Current Assets Fixed Assets Financial Markets Short-term debt Long-term debt Equity shares A. Firm issues securities F. Dividends and debt payments E. Retained cash flows C. Cash flow from firm’s assets D. Government 1.8 Cash Flows between the Firm and the Financial Markets (Figure 1.2)
1.9 Chapter 1 Quick Quiz Quick Quiz 1. Who performs the financial management function in the typical corporation? 2. What are the major advantages and disadvantages of the corporate form of organization? 3. Why is shareholder wealth maximization a more appropriate goal than profit maximization?