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Summary Notes of Corporate Finance book Berk & DeMarzo
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Corporate Finance notes (4th edition) Jonathan Berk, Peter Demarzo - ISBN: 0160
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lOMoARcPSD|13304999Summary Corporate Finance (Berk & DeMarzo)
, lOMoARcPSD|13304999
Summary Corporate Finance (Berk & DeMarzo)
Chapter 1: The corporation
Theoretisch Chapter.
1.1 four types of firms
Tax implications for corporate entities:
Classical system First, the corporation pays tax on its profits. Then the remaining
profits are distributed to the shareholders who pay their own personal income tax on
this income.
S corporations(in US) alternative system, that is not subject to double taxation.
- the shareholders must be U.S. citizens
- no more than 100 of them.
C corporations Companies which are subject to corporate taxes (>100 shareholders)
1.2 Ownership versus control of corporations
Shareholders: owners of the company
Control:
Board of directors: a group of people who have the ultimate decision-making authority in
corporations. Shareholders are able to elect the board of directors.
Chief executive officer (CEO): is charged with running the corporation by instituting the
rules and policies set by the board of directors.
Chief financial officer (CFO): most senior financial manager, who often reports directly to
the CEO. Financial managers are responsible for the three main tasks: making investment
decisions, making financing decisions and managing the firm’s cash flows.
Goal of the firm: The shareholders will agree that they are better off if management makes
decisions that increase the value of their shares.
Many people claim that because of the separation of ownership and control in a
corporation, managers have little incentive to work in the interests of the shareholders
when this means working against their own self-interest. Agency problem = when managers,
despite being hired as the agents of shareholders, put their own self-interest ahead of the
interests of shareholders.
This agency problem is commonly addressed in practice by minimizing the number of
decisions managers must make for which their own self-interest substantially differs from
the interests of the shareholders (Beloning met: opties, bonussen, aandelen). There is a
limitation to this strategy. By tying compensation too closely to performance, the
shareholders might be asking managers to take on more risk than they are comfortable
taking.
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Share price of the corporation is a barometer for corporate leaders that continuously gives
them feedback on their shareholders’ opinion of their performance.
When shareholders are dissatisfied, they can replace the board of directors or just the CEO.
Hostile takeover, an individual or organization -sometimes known as a corporate raider –
can purchase a large fraction of the equity and acquire enough votes to replace the board of
directors and the CEO. With a better management team, the shares would have a price rise
and this results in profit for the corporate raider (and other shareholders).
When a corporation borrows money, the holders of the firm’s debt also become investors in
the corporation. While the debt holders do not normally exercise control over the firm, if the
corporation fails to repay its debts the debt holders are entitled to seize the assets of the
corporation in compensation for the default. When a firm fails to repay its debts, the end
result is a change in ownership of the firm, with control passing from equity holders to debt
holders. Importantly, bankruptcy need not result in a liquidation of the firm. Even if control
of the firm passes to the debt holders, it is in the debt holders’ interest to run the firm in the
most profitable way possible.
1.3 the stock market
The value of the shares of private companies(sole proprietorship, (limited) partnership and
private limited companies) can be difficult to determine, because they have a limited set of
shareholders and they are not generally traded.
Shares of public companies (Public limited companies and corporations) are traded on a
stock market. These markets provide liquidity(=it is possible to sell it quickly and easily for a
price very close to the price at which you could contemporaneously buy it) and determine a
market price for the company’s shares.
Primary market = when a listed company issues new shares and sells them to investors, they
do so on the primary market.
Secondary market = the trade of shares between investors without the involvement of the
corporation.
Market makers (specialists) = match the buyers and the sellers of shares (makelaars).
Bid price = de biedprijs, the price the market makers stand willing to buy the stock at
Ask price = de verkoop/vraagprijs, the price they stand willing to sell the stock for.
Bid-ask spread= the difference between the bid and ask price. The customers always buy at
the ask (the higher price) and sell at the bid (the lower price). The bid-ask spread is a
transaction cost investors have to pay in order to trade.
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Chapter 2: Introduction to financial statement analysis
Theoretisch Chapter.
2.1 Firms’ disclosure of financial information
Publicly listed companies around the world are required to file their financial statements
with the relevant listing authorities periodically. They must also send an annual
report(jaarverslag) with their financial statements to their shareholders each year. Financial
statements are important tools through which investors, financial analysts and other
interested outside parties (such as creditors) obtain information about a corporation.
Investors need some assurance that the financial statements are prepared accurately.
Corporations are required to hire a neutral third party, known as an auditor, to check the
annual financial statements, to ensure that the annual financial statements are reliable and
prepared according to GAAP.
2.2 The Balance Sheet
The balance sheet equation: Assets = Liabilities + Shareholders’ Equity.
Depreciation(afschrijving gebouwen en gereedschap) is not an actual cash expense.
Book value(or carrying amount) of an asset is equal to its acquisition cost less accumulated
depreciation.
intangible assets (zijn ontastbaarheden zoals): brand names and trademarks, patents,
customer relationships and employees.
Goodwill: When a firm acquires another company, the difference between the price paid for
the company and the book value assigned to its intangible assets is recorded separately as
Goodwill.
Amortization (or impairment charge): If the firm assesses that the value of these intangible
assets declined over time, it will reduce the amount listed on the balance sheet by an
amortization (or impairment charge) that captures the change in value of the acquired
assets. Like depreciation, amortization is not an actual cash outflow.
Net working capital: The difference between current assets and current liabilities, the
capital available in the short term to run the business (=current assets – current liabilities).
book value of equity: The difference between the firm’s assets and liabilities is the
shareholders’ equity. Many of the assets listed on the balance sheet are valued based on
their historical cost rather than their true value today. The true value today of an asset may
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