Corporate finance
Chapter 1 The corporation and financial markets
1.1 Hoe zijn bedrijven georganiseerd?
● Onderscheid maken tussen:
– Aandeelhouders: hebben als eigenaars recht op de opbrengsten, maar lopen risico
– Management: bepaalt wat er in het bedrijf gebeurt
– Werknemers: doen het echte werk
● Eenmanszaak/maatschap:
– Ieder is aansprakelijk voor alle verplichtingen
● Besloten Vennootschap (BV) & Naamloze Vennootschap (NV):
– Geen van allen is aansprakelijk voor verplichtingen
1.2 De CFO
Chief Financial Officer = financieel directeur
● Is onder meer verantwoordelijk voor bedrijfsinvesteringen en de financiering daarvan
(ook voor de verslaglegging van de bedrijfsresultaten).
● Deze persoon maakt onder meer de berekeningen waar dit vak over gaat: loont het
een (des)investering te doen, hoe financieren we dat en hoe hangt dit met elkaar
samen?
1.3 De aandelenbeurs
BV’s kunnen hun aandelen niet verhandelen op een beurs, NV’s wel. “Noteren” op de beurs
heeft zin wanneer:
● aandeelhouders hun bezit zonder tijd- of waardeverlies willen kunnen (ver)kopen
(“liquidity to shareholders”).
● Het bedrijf een groot bedrag aan nieuwe aandelenvermogen nodig heeft.
→ Dit is relevanter naarmate bedrijven en de bedragen groter zijn.
“Op de beurs” worden aandelen verhandeld van bedrijven.
● De beurs is anoniem: je weet niet met wie je een transactie afsluit de beurs regelt het
afrekenen en zorgt ervoor dat gekochte aandelen in je depot komen.
● Maar de omzetten en de prijzen van iedere aandelentransactie zijn wèl zichtbaar
voor iedereen.
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Maak onderscheid tussen:
● Primaire markt: het bedrijf biedt nieuw aandelen aan
– “Initial Public Offering” (IPO) = aandelenemissie
– Eenmalig aanbod
● Secundaire markt: handel in bestaande aandelen
– Handel tussen beleggers, banken enzovoort.
– Continue bedrijf; handel gaat voortdurend door
1.1 The four types of firms
Four major types of firms: sole proprietorships, partnerships, limited liability companies, and
corporations.
A sole proprietorship is a business owned and run by one person.
Key characteristics:
1. Sole proprietorships are straightforward to set up. Consequently, many new
businesses use this Organizational form.
2. The principal limitation of a sole proprietorship is that there is no separation between
the firm and the owner- the firm can have only one owner. If there are other investors,
they cannot hold an ownership stake in the firm.
3. The owner has unlimited personal liability for any of the firm’s debts. That is, if the
firm defaults on any debt payment, the lender can (and will) require the owner to
repay the loan from personal assets. An owner who cannot afford to repay the loan
must declare personal bankruptcy.
4. The life of a sole proprietorship is limited to the life of the owner. It is also difficult to
transfer ownership of a sole proprietorship.
For most businesses, the disadvantages of a sole proprietorship outweigh the advantages.
As soon as the firm reaches the point at which it can borrow without the owner agreeing to
be personally liable, the owners typically convert the business into a form that limits the
owner’s liabilities.
A partnership is identical to a sole proprietorship except it has more than one owner.
Key features:
1. All partners are liable for the firm’s debt. That is, a lender can require any partner to
repay all the firm’s outstanding debts.
2. The partnership ends on the death or withdrawal of any single partner, although
partners can avoid liquidation if the partnership agreement provides for alternatives
such as a buyout of a deceased or withdrawn partner.
A limited partnership is a partnership with two kinds of owners, general partners and
limited partners. General partners have the same rights and privileges as partners in a
(general) partnership - they are personally liable for the firm’s debt obligations. Limited
partners however have limited liability that is their liability is limited to their investment. A
limited partner has no management authority and cannot legally be involved in the
managerial decision making for the business.
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A limited liability company (LLC) is a limited partnership without a general partner. That is,
all the owners have limited liability, but unlike limited partners, they can also run the
business.
The distinguishing feature of a corporation is that it is a legally defined, artificial being (a
judicial person or legal entity), separate from its owners. It can enter into contracts, acquire
assets, incur obligations. Because a corporation is a legal entity separate and distinct from
its owners, it is solely responsible for its own obligations. Consequently, the owners of a
corporation are not liable for any obligations the corporations enter into. Similarly the
corporation is not liable for any personal obligations of its owners.
Corporations must be legally formed, which means that the state in which it is incorporated
must formally five its consent to the incorporation by chartering it.
The entire ownership stake of a corporation is divided into shares known as stock. The
collection of all outstanding shares of a corporation is known as the equity of the
corporation. An owner of a share of stock in the corporation is known as a shareholder,
stockholder, or equity holder and is entitled to dividend payments, that is, payments
made at the discretion of the corporation to its equityholers.
The corporate organizational structure is the only organizational structure subject to double
taxation. However, the U.S. international revenue code allows an exemption from double
taxation for “s” corporations, which are coronations that elect subchapter s tax treatment.
Under these tax regulations, the firm’s profits (and losses) are not subject to corporate taxes,
but instead are allocated directly to shareholders based on their ownership stake. The
shareholders must include these profits as income on their individual tax returns (even if no
money is distributed to them). However, after the shareholders have paid income taxes on
these profits, no further tax is due.
The most large corporations are “C” corporations, which are corporations subject to
corporate taxes. S corporations account for less than one quarter of all corporate revenue.
1.2 ownership versus control of corporations
Rather than the owners, the board of directors and chief executive officer possess direct
control of the corporation.
The shareholders of a corporation exercise their control by electing a board of directors, a
group of people who have the ultimate decision making authority in the corporation.
The chief executive officer (CEO) is charged with running the corporation by instituting the
rules and policies set by the board of directors. The most senior financial manager is the
chief financial officer (CFO), who often reports directly to the CEO.
Within the corporation, financial managers are responsible for three main tasks: making
investment decisions, making financing decisions, and managing the firm’s cash flows.
The financial manager’s most important job is to make the firm’s investment decisions. The
financial manager must weigh the costs and benefits of all investments and projects and
decide which of them qualify as good uses of money stockholders have invested in the firm.
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Once the financial manager has decided which investments to make, he or she also decides
how to pay for them.
The financial manager must ensure that the firm has enough cash on hand to meet its
day-to-day obligations.
The financial managers’ job is to make sure that access to cash does not hinder the firm’s
success.
Agency problem: when managers, despite being hired as the agents of shareholders, put
their own self-interest ahead of the interest of shareholders.
Hostile takeover: an individual or organization - sometimes known as a corporate raider -
can purchase a large fraction of the stock and acquire enough votes to replace the board of
directors and the CEO. Although the words hostile and raider have negative connotations,
corporate raiders themselves provide an important service to shareholders. The mere threat
of being removed as a result of a hostile takeover is often enough to discipline bad
managers and motivate board of directors to make difficult decisions.
Liquidation: when a firm fails to repay its debts, the end result is a change in ownership of
the firm, with control passing from equity holder to debt holder, which involves shutting down
the business and settling off its assets.
1.3 The stock market
Private companies: have a limited set of shareholders and their shares are not regularly
traded, the value of their shares can be difficult to determine.
Public companies: whose shares trade on organized markets called a stock market/stock
exchange.
An investment is said to be liquid if it is possible to sell it quickly and easily for a price very
close to the price at which you could contemporaneously buy it. This liquidity is attractive to
outside investors, as it provides flexibility regarding the timing and duration of their
investment in the firm.
When a corporation itself issues new shares of stock and sells them to investors, it does so
on the primary markets. After the initial transaction between the corporation and investors,
the shares continue to trade in a secondary market.
Market makers (known then on the NYSE as specialists matched buyers and sellers.
Bid price: price for buying the stock
Ask price:price for selling the stock
Market makers provide liquidity by ensuring that market participants always had somebody
to trade with.
Bid-ask-spread: difference between ask and bid price = amount of money that market
makers make. The bid-ask spread is a transaction cost investors pay in order to trade.
Limit order: an order to buy or sell an amount at a fixed price. The collection of all limit
orders is known as the limit order book. Exchanges make their limit order books public so
