Principles of Corporate Finance

Brealey, Myers, Partington and Robinson

1st Australian Edition

Finance and the Financial Manager

Slides by Matthew Will and Graham Partington

Chapter 1
2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 1

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Topics Covered
 The Decisions a Financial Manager Makes  The Role of The Financial Manager  The Cash Flow Identity  Value and Capital Markets  Conflicts of Interest  Who Is The Financial Manager?

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2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 2

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What Are The Decisions?

 What assets to acquire
The Investment Decision

 How to finance the assets

The Financing Decision
Subdivided into decisions about debt and equity

 How much cash to distribute to shareholders

The Dividend Decision

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2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 3

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Role of The Financial Manager

(1)

Firm's operations

Financial manager

Financial markets

(1) Cash raised from investors

Irwin/McGraw Hill

2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 4

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Role of The Financial Manager

(2) (1)

Firm's operations

Financial manager

Financial markets

(1) Cash raised from investors (2) Cash invested in firm

Irwin/McGraw Hill

2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 5

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Role of The Financial Manager

(2) (1)

Firm's operations
(3)

Financial manager

Financial markets

(1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations

Irwin/McGraw Hill

2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 6

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Role of The Financial Manager

(2) (1)

Firm's operations
(3)

Financial manager

(4a)

Financial markets

(1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested
2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 7

Irwin/McGraw Hill

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Role of The Financial Manager

(2) (1)

Firm's operations
(3)

Financial manager

(4a)

Financial markets

(4b)

(5)
(1) Cash raised from investors (2) Cash invested in firm

Tax paid to Government

(5) Tax leakage

(3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors
Irwin/McGraw Hill 2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 8

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Linking Decisions by Cash Flow

 The Cash Flow Identity

 Dividends +New Investment = Cash From Operations + Financing Financing = Increase in debt +Proceeds of Share Issues
2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 9

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Financial Choices and Cash Flow

 Typical Behaviour: Debt used to balance the cash flow identity
Dividends + Investment- Cash From Operations = Debt Issued Eg. Managers Plan: Divs = 20; Investment = 50; CFO = 40; Debt 10; Shares 0.
Not Feasible: Uses = 70, Sources = 50; Shortfall = 20. Solutions: Raise more debt, or issue more shares, or make less investment, or pay less dividends
2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 10

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Financial Markets and Value

 Objective: Maximise Value
Requires understanding of how assets, debt and equity are priced in financial markets

 Security prices depends on how long you wait for the return and how much risk you bear  Prices change quickly with the flow of information through the markets  Actions (company financial decisions) often speak louder than words
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Special Factors in Australia

 Debt and equity securities in Australia often suffer from thin trading __ in this case treat prices with caution  International interest rates and exchange rates are particularly important to Australian financial managers

Irwin/McGraw Hill

2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 12

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Conflicts of Interest
 Managers, owners, debtholders, and other stakeholders, such as customers may have conflicting objectives  An agency problem exists where the principal has to entrust their interests to an agent who acts on their behalf  Contractual arrangements, incentive schemes, and monitoring are used to control agency conflicts
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Who is The Financial Manager?

Chief Financial Officer

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2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 14

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Who is The Financial Manager?

Chief Financial Officer

Treasurer

Controller

Irwin/McGraw Hill

2000 McGraw-Hill Book Company Australia Pty Ltd PPT t/a Principles of Corporate Finance by Brealey et al. 15