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Summary Corporate Finance (Berk & DeMarzo)
Financial Markets (Maastricht University)
by
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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
