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Corporate Finance Summary
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,Lecture 1 - Chapter 1, 3, & 4→ Chapter 1 - Introduction to Corporate Finance
What is Corporate Finance?
– Corporate finance involves deciding on long-term investments, finding the
right funding sources, and managing daily financial activities to increase
company value and ensure financial stability.
– Three main questions need to be answered:
1. What long-term investments should you make? That is, what lines
of business will you be in, and what sorts of buildings, machinery
and equipment will you need?
2. Where will you get the long-term financing to pay for your
investment? Will you bring in other owners, or will you borrow the
money?
3. How will you manage your everyday financial activities, such as
collecting from customers and paying suppliers?
1.1 The Financial Manager
– Managers represent the owner's interests and make decisions on their
behalf.
Financial Management Decisions
• Capital Budgeting - The first question concerns the firm’s long-term
investments. The process of planning and managing a firm’s long-term
investments is called capital budgeting.
→ In capital budgeting, the financial manager tries to identify investment
opportunities that are worth more to the firm than they cost to acquire.
, → Evaluating the size, timing, and risk of future cash flows is the essence
of capital budgeting.
• Capital Structure - The second question for the financial manager
concerns ways in which the firm obtains and manages the long-term
financing it needs to support its long-term investments. A firm’s capital
structure (or financial structure) is the specific mixture of long-term
debt and equity the firm uses to finance its operations.
→ The financial manager has two concerns in this area:
• First, how much should the firm borrow? That is, what mixture of
debt and equity is best? The mixture chosen will affect both the
risk and the value of the firm.
• Second, what are the least expensive sources of funds for the firm?
• Working Capital Management - The third question concerns working
capital management. The term working capital refers to a firm’s short-
term assets, such as inventory, and its short-term liabilities, such as
money owed to suppliers. Managing the firm’s working capital is a day-
today activity which ensures that the firm has sufficient resources to
continue its operations and avoid costly interruptions. This involves a
number of activities related to the firm’s receipt and disbursement of cash.
, 1.2 The goal of Financial Management
– Possible financial goals include;
• Survive • Maximize sales or market share.
• Avoid financial distress • Minimize costs.
and bankruptcy. • Maximize profits.
• Beat the competition. • Maintain steady earnings growth.
The appropriate goal for financial
management is to maximise the current
value per share of the existing equity.
– So, corporate finance can be defined as the study of the relationship
between business decisions and the value of the equity in the business.
1.3 Financial Markets and the Corporation
– The primary advantage of financial markets is that they facilitate the flow
of money from those that have surplus cash to those that need financing.
Cash flows to and from the firm
• Cash flows to the firm from
the financial markets (A).
• The firm invests the cash in assets (B).
These can be short term (current) or
long term (non-current), and they
generate cash (C), some of which goes
to pay corporate taxes (D).
• After taxes are paid, some of this cash
flow is reinvested in the firm (E).
• The rest goes back to the financial markets as
cash paid to creditors and shareholders (F).
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