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8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
1/22
BUAD-6200 || Corporate Finance || Chapter 1 University of Toledo || College of Bsiness and !nnovation
Lecture- (Chapter-01)
Introduction to Corporate Finance
Chapter Outline
1.1 What is Corporate Finance?
1.2 The Corporate Firm1.3 The Importance of Cash Flows
1.4 The Goals of Financial Management
1.5 The Agency Problem and Control of the Corporation
1.6 Regulation
BUAD-6200: Corporate Finance
1
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
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CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD-6200 || Corporate Finance || Chapter 1
Key Concept and !"i##
" Know the basic types of nancial management decisionsand the role of the Financial Manager
" Know the nancial implications of the various forms ofbusiness organiation
" Know the goal of nancial management
" !nderstand the con"icts of interest that can arise betweenowners and managers
" !nderstand the various types of nancial markets
#
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
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CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD-6200 || Corporate Finance || Chapter 1
$hat i Corporate Finance%
Corporate Finance addresses the followingthree &uetion$
" %hat long&term investments should the rm engagein'
" (ow can the rm raise the money for the re)uiredinvestments'
" (ow much short&term cash "ow does a company needto pay its bills'
*
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
4/22
CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
'he Ba#ance-!heet ode# o the Fir*
Total Value of Assets
+
Current Assets
Fixed Assets
1 Tangible
2 Intangible Shareholder
s’ Equity
Current
Liabilities
Long-Term
ebt
Total Firm Value to Investors
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
5/22
CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
'he Ba#ance-!heet ode# o the Fir*
,
Current Assets
Fixed Assets
1 Tangible
2 IntangibleShareholders’
Equity
Current
Liabilities
Long-Term
ebtWhat long-terminvestments
should the firmengage in?
The Capital Budgeting Decision
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
6/22
CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
'he Ba#ance-!heet ode# o the Fir*
-
The Capital Structure Decision
o! can the firm
raise the mone"
for the re#uired
investments?
Current Assets
Fixed Assets
1 Tangible
2 Intangible Shareholders’
Equity
Current
Liabilities
Long-Term
ebt
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
7/22
CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
'he Ba#ance-!heet ode# o the Fir*
.
The $et Wor%ing Capital Investment Decision
!et
"or#ing
Ca$ital
o! much short-termcash flo! does a
compan" need to pa"its &ills?
Current
Liabilities
Long-Term
ebt
Current Assets
Fixed Assets
1 Tangible
2 IntangibleShareholders’
Equity
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
8/22
CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
Capita# !tructure
/
%&'
ebt
%&'
Equity
2%'
ebt
(%'
Equity
The )alue o* the *irm +an bethought o* as a $ie,
The goal o* the manager is to
in+rease the sie o* the $ie,
The Ca$ital Stru+ture de+ision +an
be )ie.ed as ho. best to sli+e u$ a
the $ie,
I* ho. you sli+e the $ie a**e+ts the sie o* the $ie/ then the
+a$ital stru+ture de+ision matters,
(&' ebt
0&'
Equity
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
9/22
CorporateFinance Total FirmValue CorporateFirm FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
+ypothetica# ,rani.ation Chart
0
Chairman of the Board andChief Executive Officer (CEO)
Board of Directors
President and ChiefOperating Officer (COO)
Vice President andChief Financial Officer (CFO)
Treasurer Controller
Cash anager
Capital Expenditures
Credit anager
Financial Planning
Tax anager
Financial !ccounting
Cost !ccounting
Data Processing
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
10/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
'he Financia# anaer
To create value the nancial manager should$" Try to make smart investment decisions2
" Try to make smart nancing decisions2
13
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
11/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
Cash flo#fro$ fir$ (C)
'he I*portance o Cah F#o/
11
T a % e s
( D )
Fir$
&overn$ent
Fir$ isses secrities (A)
'etainedcash flo#s (F)
!nvests
in assets
(B)
Dividends andde(t pay$ents (E)
Crrent assets
Fi%ed assets
Financial
$ar)ets
*hort-ter$ de(t+ong-ter$ de(t
,ity shares
ltimately/ the *irm must be a
cash generating activit"'
The +ash *lo.s *rom the *irm
must ex+eed the +ash *lo.s *rom
the *inan+ial mar#ets'
U i it f T l d || C ll f B i d ! ti
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
12/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
'he Corporate Fir*
The corporate form of business is the standard methodfor solving the problems encountered in raising largeamounts of cash2
(owever businesses can take other forms2
1#
U i it f T l d || C ll f B i d ! tiBUAD6200 || C Fi || Ch 1
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
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CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
For* o Buine ,rani.ation
The 4ole5roprietorship
The 5artnership" 6eneral
5artnership" 7imited 5artnership The Corporation
8dvantages and9isadvantages" 7i)uidity and
Marketability of:wnership
" Control" 7iability" Continuity of ;
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
14/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of Bsiness and !nnovationBUAD6200 || Corporate Finance || Chapter 1
A Co*parion o artnerhip and Corporation
1+
Corporation 5artnership7i)uidity 4hares can
easily beeights !sually each
share gets onevote
6eneral partner is in
charge? limitedpartners may havesome voting rights
Ta
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
15/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
'he oa# o Financia# anae*ent
%hat is the correct goal'" Ma
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
16/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
'he Aency ro#e*
8gency relationship" 5rincipal hires an agent to represent hisBher interest
" 4tockholders principalsD hire managers agentsD to runthe company
8gency problem" Con"ict of interest between principal and agent
Can you name one or two agency relationshipfrom your everyday life'
" 9octors car mechanic or '
1-
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
17/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
anaeria# oa#
Managerial goals may be diAerent fromshareholder goals" ;
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
18/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
anain anaer
Managerial compensation" Encentives can be used to align management and
stockholder interests
" The incentives need to be structured carefully tomake sure that they achieve their intended goal
Corporate control" The threat of a takeover may result in better
management
:ther stakeholders
1/
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
19/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
!eparation o ,/nerhip and Contro#
10
Board of Directors
.anage$ent
Assets
De(t
,ity
*
h ar eh ol d er s
D
e ( t h ol d er
s
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
20/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
Financia# ar"et
5rimary Market" %hen a corporation issues securities cash "ows from
investors to the rm2
" !sually an underwriter is involved
4econdary Markets" Envolve the sale of usedG securities from one investor
to another2
" 4ecurities may be e
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
21/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
y || gBUAD6200 || Corporate Finance || Chapter 1
Financia# ar"et
#1
Firms
In)estors
Se+ondary ar#et
money
se+urities
Sue3ob
Stoc%s and
Bonds
oney
4rimary ar#et
University of Toledo || College of BsinessBUAD6200 || Corporate Finance || Chapter 1
8/16/2019 Chap-01-Lecture-Summer_16_Ross_10 India Yu.pptx
22/22
CorporateFinance
Total FirmValue
CorporateFirm
FinancialMarket
y || g|| p || p
3uic" 3ui.
%hat are the three basic )uestions Financial Managersmust answer'
%hat are the three ma=or forms of businessorganiation'
%hat is the goal of nancial management'
%hat are agency problems and why do they e