1、Chapter Outline,1.1 What is Corporate Finance? 1.2 Corporate Securities as Contingent Claims on Total Firm Value 1.3 The Corporate Firm 1.4 Goals of the Corporate Firm 1.5 Financial Institutions, Financial Markets, And The Corporation 1.6 Trends in Financial Markets and Management 1.7 Outline of the
2、 Text,What is Corporate Finance?,Corporate Finance addresses the following three questions:What long-term investments should the firm engage in? How can the firm raise the money for the required investments? How much short-term cash flow does a company need to pay its bills?,The Balance-Sheet Model
3、of the Firm,The Balance-Sheet Model of the Firm,Current Assets,Fixed Assets 1 Tangible 2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,What long-term investments should the firm engage in?,The Capital Budgeting Decision,The Balance-Sheet Model of the Firm,How can the firm raise t
4、he money for the required investments?,The Capital Structure Decision,Current Assets,Fixed Assets 1 Tangible 2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,The Balance-Sheet Model of the Firm,How much short-term cash flow does a company need to pay its bills?,The Net Working Cap
5、ital Investment Decision,Net Working Capital,Shareholders Equity,Current Liabilities,Long-Term Debt,Current Assets,Fixed Assets 1 Tangible 2 Intangible,Capital Structure,The value of the firm can be thought of as a pie.,The goal of the manager is to increase the size of the pie.,The Capital Structur
6、e decision can be viewed as how best to slice up the pie.,If how you slice the pie affects the size of the pie, then the capital structure decision matters.,50% Debt,50% Equity,Hypothetical Organization Chart,The Financial Manager,To create value, the financial manager should: Try to make smart inve
7、stment decisions. Try to make smart financing decisions.,Cash flow from firm (C),The Firm and the Financial Markets,Taxes (E),Firm issues securities (A),Retained cash flows (D),Invests in assets (B),Dividends and debt payments (F),Current assets Fixed assets,Short-term debt Long-term debt Equity sha
8、res,Ultimately, the firm must be a cash generating activity.,The cash flows from the firm must exceed the cash flows from the financial markets.,1.2 Corporate Securities as Contingent Claims on Total Firm Value,The basic feature of a debt is that it is a promise by the borrowing firm to repay a fixe
9、d dollar amount by a certain date. The shareholders claim on firm value is the residual amount that remains after the debtholders are paid. If the value of the firm is less than the amount promised to the debtholders, the shareholders get nothing.,Debt and Equity as Contingent Claims,$F,Debt holders
10、 are promised $F.,If the value of the firm is less than $F, they get whatever the firm is worth.,If the value of the firm is more than $F, debt holders get a maximum of $F.,If the value of the firm is less than $F, share holders get nothing.,If the value of the firm is more than $F, share holders ge
11、t everything above $F.,Algebraically, the bondholders claim is: Min$F,$X,Algebraically, the shareholders claim is: Max0,$X $F,Combined Payoffs to Debt and Equity,$F,Debt holders are promised $F.,If the value of the firm is less than $F, the shareholders claim is: Max0,$X $F = $0 and the debt holders
12、 claim is Min$F,$X = $X. The sum of these is = $X,If the value of the firm is more than $F, the shareholders claim is: Max0,$X $F = $X $F and the debt holders claim is:Min$F,$X = $F. The sum of these is = $X,1.3 The Corporate Firm,The corporate form of business is the standard method for solving the
13、 problems encountered in raising large amounts of cash. However, businesses can take other forms.,Forms of Business Organization,The Sole Proprietorship The Partnership General Partnership Limited Partnership The CorporationAdvantages and Disadvantages Liquidity and Marketability of Ownership Contro
14、l Liability Continuity of Existence Tax Considerations,A Comparison of Partnership and Corporations,1.4 Goals of the Corporate Firm,What are firm decision-makers hired to do? The traditional answer is that the managers of the corporation are obliged to make efforts to maximize shareholder wealth.,Th
15、e Set-of-Contracts Perspective,The firm can be viewed as a set of contracts. One of these contracts is between shareholders and managers. The managers will usually act in the shareholders interests. The shareholders can devise contracts that align the incentives of the managers with the goals of the
16、 shareholders. The shareholders can monitor the managers behaviour. This contracting and monitoring is costly.,Managerial Goals,Managerial goals may be different from shareholder goals Expensive perquisites Survival Independence Increased growth and size are not necessarily the same thing as increas
17、ed shareholder wealth.,Separation of Ownership and Control,Board of Directors,Management,Assets,Debt,Equity,Shareholders,Debtholders,The Agency Problem,The agency relationship Will managers work in the shareholders best interests? Agency costs Direct agency costs Indirect agency costs Control of the
18、 firm How do agency costs affect firm value (and shareholder wealth)?,Do Shareholders Control Managerial Behaviour?,Shareholders vote for the board of directors, who in turn hire the management team. Contracts can be carefully constructed to be incentive compatible. There is a market for managerial
19、talentthis may provide market discipline to the managersthey can be replaced. If the managers fail to maximize share price, they may be replaced in a hostile takeover.,Direct finance,Loans,Financial intermediaries,Deposits,Financial InstitutionsIndirect finance,1.5 Financial Institutions, Financial
20、Markets, and the Corporation,Funds suppliers,Funds demanders,Financial Markets,Money versus Capital Markets Money Markets For short-term debt instruments Capital Markets For long-term debt and equity,Financial Markets,Primary versus Secondary Markets Primary Market When a corporation issues securiti
21、es, cash flows from investors to the firm. Usually an underwriter is involved Secondary Markets Involve the sale of “used” securities from one investor to another. Securities may be exchange traded or trade over-the-counter in a dealer market.,Financial Markets,Firms,Investors,Sue,Bob,1.6 Trends in
22、Financial Markets and Management,Integration and globalization Increased volatility Financial Engineering reduces costs related to Risk Taxes Fnancing costs Improved computer technology allows Economies of scale and scope Regulatory dialectic,1.7 Outline of the Text,Overview Value and Capital Budgeting Risk Capital Structure and Dividend Policy Long-Term Financing Options, Futures, and Corporate Finance Financial Planning and Short-Term Finance Special Topics,
