Summary
Summary Corporate Finance
- Course
- Institution
Summary of Corporate Finance for BA2 Business Economics at the VUB.
[Show more]
Seller
Follow
Madikan
Reviews received
Content preview
CORPORATE FINANCE BUSINESS ECONOMICS IICORPORATE FINANCE
BUSINESS ECONOMICS II, SEMESTER I
Table of Content:
- Introduction + Chapter 1: The Role and Objective of Financial Management p. 1
- Chapter 5: The Time value of Money p. 7
- Chapter 6: Bond (fixed-income securities) p. 21
- Chapter 7: Common Stock Valuation (& Issuance) p. 29
- Chapter 8: Analysis of Risk and Return p. 37
- Chapter 4: Statement of Cash Flows p. 59
- Guestlecture 1: Building a Solid Investment Philosophy p. 73
- Chapter 9: Capital Budgeting and Cash Flow Analysis p. 85
- Chapter 10: Capital Budgeting: Decision, Criteria and Real Option p. 97
Considerations
- Chapter 12: The Cost of Capital p. 113
- Chapter 11: Capital Budgeting and Risk p. 127
- Chapter 14: Capital Structure Management in Practice p. 139
- Guestlecture 2: Real Estate Finance p. 153
- Chapter 13: Optimal Capital Structure Concepts: p. 173
Theory of Modigliani and Miller
p. 179
,CORPORATE FINANCE BUSINESS ECONOMICS II
Part 1: Introduction
Chapter 1: The role and Objective of Financial Management
Key chapter concepts:
- Shareholder wealth is defined as the present value of the expected future returns to the owners of the firm. It is
measured by the market value of the shareholders’ common stock holdings.
- The primary normative goal of the firm is to make the most efficient use of the firm’s resources and thereby to
maximize shareholder wealth.
- Achievement if the shareholder wealth maximization goal is constrained by social responsibility concerns and
problems arising out of agency relationships.
- The market value of a firm’s stock is determined by the magnitude, timing and risk of the cash flows the firm us
expected to generate. Managers can take a variety of actions to influence the magnitude, timing and risk of the
firm’s cash flows. These actions are often classified as investment, financing and dividend decisions.
- Ethical standards of performance frame the bounds of decision making by leaders, managers and other employees.
- The most important forms of business organization are the:
o Sole proprietor.
o Partnership – both limited and general.
o Corporation.
- Corporations have the advantages of limited liability for owners, potentially perpetual life and the ability to raise
large amount of capital. Even though they account for less than 18 percent of U.S. firms, corporations account for
81 percent of U.S. business revenues.
- The finance function is usually headed by a chief financial officer.
o Financial management responsibilities are often divided between the controller and treasurer.
o The controller normally has responsibility for all activities related to accounting.
o The treasurer is normally concerned with the acquisition, custody and expenditure of funds.
Chapter objectives:
- Upon completion of this chapter, you should have a clear understanding of the following
topics:
o The primary goal of firms.
o The determinants of the value of a firm.
o The meaning and implications of agency problems in a corporation.
Introduction
- Financial managers have the primary responsibility for acquiring funds (cash) needed by a firm
and for directing those funds into projects that will maximize the value of the firm.
Questions faced by financial managers
- Will a particular investment be successful?
o Investment decision.
- Where will the funds come from to finance the investment?
o Financing decision.
- How should wash flows be used or distributed? That is, what is the optimal dividend policy?
o Dividend/Pay out decision.
1
,CORPORATE FINANCE BUSINESS ECONOMICS II
A firm’s cash flow generation process
Raise Funds (Cash)
1. External
Owners (equity) Acquire Assets
Used 1. Long term
Creditors (debt)
to 2. Working capital
2. Internal
Cash flow from operations
Sale of assets
Used to
1. Funds for reinvestment
2. Funds to distribute to
owners and creditors Produce and Sell
Products/Services
Result in 1. Services provided or inventories
converted to cash sales and
accounts receivable
2. Accounts receivable collected and
converted to cash
The Goal of Shareholder Wealth Maximization
- Maximize shareholder wealth
= The most widely accepted objective of the firm is to make the most efficient use of the
firm’s resources and thereby maximize the value of the firm for its owners (that is, to
maximize shareholder wealth)
Shareholder wealth maximization is a market concept and results in
- Maximizing present value (= PV, defined as the value today of some future payment evaluated at an
appropriate discount rate) of expected future cash flows.
o (1) Amount of
o (2) Timing of Expected cash flows
o (3) Risk of
- Measured by Market Value the firm’s common stock.
o Market value is defined as the price at which the stock trades in the marketplace.
à Good decision increased the market price of common stock.
- The value of the firm is the stock-price multiplied by the number of stocks.
Shareholders wealth = Numbers of shares outstanding x Market price per share
o The shareholders wealth maximization goal states that management should seek to maximize the
present value of the expected future returns to the owners (that is, shareholders) of the firm. These
returns can take form of periodic dividend payments or proceeds from the sale of the common stock.
Stock prices, the measure of shareholder wealth, reflect the magnitude, timing and risk associated with
future benefits expected to be received by stockholders. Shareholders wealth is measured by the market
value of the shareholders’ common stock holding.
- Effective decision making requires an understanding of the goals of the firms:
o Accounting figure
o Static (no timing)
o No risk
§ Shareholder wealth maximization is NOT profit maximization.
2
, CORPORATE FINANCE BUSINESS ECONOMICS II
Stakeholder Concerns:
- Most firms recognize the importance of the interest of all their constituent groups, or stakeholders- customers,
employees, supplier, and the communities in which they operate – and not just interests of stockholders.
o Example:
§ Firms normally recognize responsibilities to various consistencies, such as:
• To sustain an optimum return on investment for stockholders
• To be perceived by customers as a provider of quality service
• To demonstrate the employees are the firm’s most valuable resource
• To provide corporate leadership in the communities it serves
• To operate compatibly with environmental standards and initiate programs that are
sensitive to environmental issues
Divergent Objectives
- The goal of shareholder wealth maximization specifies how financial decisions should be made. In practice,
however, not all management decisions are consistent with this objective.
o There is often a separation between the shareholders’ wealth maximization and the actual goals pursued
by the organization.
§ The separation has permitted the managers to pursue goals more consistent with their own
self-interest as long as they satisfy shareholders sufficiently to maintain control of the
corporation.
- Problem created by separation of:
o Owners (shareholders)
o Management (control)
§ Management may maximize its own welfare (or utility) instead of the
shareholders’ wealth.
• Consumption of on-the-job perquisites (use of company cars,
airplanes, luxurious offices).
• Empire building (maximizing the revenues, as big as possible, … it is
not a good thing to buy companies (merger) to maximize the view of
the company but if it doesn’t increase the revenue of the company it
is a bad decision).
Agency relationships
Principal Shareholders (owners)
Shareholder
Board of Directors Wealth
Maximization
Agent Management
CEO, CFO, …
- The existing of divergent objectives between owners and managers is one example of a class of problems arising
from agency relationships.
- Agency relationship
o Occurs when one or more individual (the principals) hire another individual (the
agent) to perform service on behalf of the principals.
o Principals often delegate decision-making authority to the agent.
§ Two important agency relationship:
• Relationship between shareholders and creditors.
• Relationship between shareholders (owners) and managers.
3
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Madikan. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $7.00. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67096 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now