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Introduction to Corporate Finance. Aswath Damodaran. Stern School of Business. What is corporate finance?. Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a corporate finance decision. - PowerPoint PPT Presentation
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Aswath Damodaran 1
Introduction to Corporate Finance
Aswath Damodaran
Stern School of Business
Aswath Damodaran 2
What is corporate finance?
Every decision that a business makes has financial implications, and any decision which affects the finances of a business is a corporate finance decision.
Defined broadly, everything that a business does fits under the rubric of corporate finance.
Aswath Damodaran 3
The Three Major Decisions in Corporate Finance
The Allocation decision• Where do you invest the scarce resources of your business?
• What makes for a good investment? The Financing decision
• Where do you raise the funds for these investments?
• Generically, what mix of owner’s money (equity) or borrowed money(debt) do you use?
The Dividend Decision• How much of a firm’s funds should be reinvested in the business and how
much should be returned to the owners?
Aswath Damodaran 4
The Traditional Accounting Balance Sheet
AssetsLiabilitiesFixed AssetsDebtEquityShort-term liabilities of the firmIntangible AssetsLong Lived Real AssetsAssets which are not physical,like patents & trademarksCurrent AssetsFinancial InvestmentsInvestments in securities &assets of other firmsShort-lived AssetsEquity investment in firmDebt obligations of firmCurrent LiabiltiesOther LiabilitiesOther long-term obligationsThe Balance Sheet
Aswath Damodaran 5
The Financial View of the Firm
AssetsLiabilitiesAssets in PlaceDebtEquityFixed Claim on cash flowsLittle or No role in managementFixed MaturityTax Deductible
Residual Claim on cash flowsSignificant Role in managementPerpetual Lives
Growth AssetsExisting InvestmentsGenerate cashflows todayIncludes long lived (fixed) and
short-lived(working capital) assets
Expected Value that will be created by future investments
Aswath Damodaran 6
First Principles of Corporate Finance
Invest in projects that yield a return greater than the minimum acceptable hurdle rate.
• The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt)
• Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects.
Choose a financing mix that minimizes the hurdle rate and matches the assets being financed.
If there are not enough investments that earn the hurdle rate, return the cash to stockholders.
• The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics.
Objective: Maximize the Value of the Firm