Today’s Agenda

1-1

• Course introduction
• Chapter 1: Introduction to corporate
finance

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 Course goals
1-2

• Develop students ability to estimate the value of long term

projects by estimating of cost of capital and developing
cash flow projections
• Provide students with detailed knowledge about the
important features that a company need to consider when
deciding on what levels of debt and equity financing to use
• Provide students with detailed knowledge about important
factors that determines a company’s debt ratio and payout
policy.

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 Course material
1-3

• Richard Brealey, Stewart Myers & Franklin Allen, “Principles

of Corporate Finance,” McGraw-Hill, 12th Edition (2017)
• Various news articles

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 Course format
1-4

• Instructional teaching of corporate finance concepts.

• Students working on exercises and problems and
discussing the results in class.
• Discussion of exercises and news articles related to the
topics covered in class
• Students will have to complete a quiz on all the main topics
covered in the course

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 Course outline
1-5

Schedule Topic Readings Date

Week 1 Introduction to Corporate Finance Ch.1 Jan 28-Feb 1
Week 2 Making investment with the NPV rule Ch.6 Feb 4-8
Winter Break Feb 11-15
Week 3 Risk and cost of capital Ch.9 Feb 18-22
Week 4 No class Feb 25- March 1
Week 5 Risk and cost of capital Ch.9 March 4-8
Week 6 Project analysis Ch.10 March 11-15
Week 7 An overview of corporate financing Ch.14 March 18-22
Week 8 Review and Mid-term exam Ch. 1,6,9,10,14 March 23-29
Week 9 Payout policy Ch.16 April 1-5
Week 10 How much should a corporation borrow Ch.18 April 8-12
Easter Break April 15-19
Week 11 Financing and Valuation Ch.19 April 22-26
Week 12 Financing and Valuation Ch.19 April 29-May 3
Week 13 Credit risk and the value of corporate debt Ch.23 May 6-10
Week 14 Mergers Ch.31 May 13-17
Week 15 Final exam review Ch.16,18,19,23,31 May 20-24
Final exam TBA

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 Grading
1-6

• Attendance and in-class participation: 10%

• Quizzes: 15%
• Group assignment: 5%
• Mid-term examination: 20%
• Final examination: 50%

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 Grading
1-7

Participation (10%)

• Students are expected to attend, participate actively in

classes, and complete exercises and assignments

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 Grading
1-8

Quizzes (15%)
• Student will need to complete a quiz or assignment after
most sessions.
• Late assignments will generally not be accepted

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 Grading
1-9

Group Assignment (5%)

• Student will in groups complete an assignment, which will
be due towards the end of the semester.

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 Grading
1-10

Mid-term exam (20%)

• One mid-term exam in class on Moodle.
• The exam will consist of multiple choice questions and
problems.
• No make-up exams will be given except for medical
reasons supported by confirmed documentation.

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 Grading
1-11

Final (50%)
• Closed book which covers all the chapters after the Mid-
term exam.
• May consist of multiple choice questions, essays, and/or
problems.
• Except special cases, no makeup test will be allowed if
students fail to seek advance permission

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 Passing Requirement
1-12

1.Students must receive a minimum score of 60% on

the final exam

2.Students must receive a minimum overall weighted

course score of 60%

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 Introduction to Corporate Finance
1-13

Chapter 1: Introduction to corporate

finance
• Corporate Investment and Financing Decisions
• The Financial Goal of the Corporation

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 The Financial Goal of the Corporation
1-14

Exercise:
• Fill in the following terms below: financing, real, bonds,
investment, executive airplanes, financial, capital
budgeting, brand names

• Company’s usually buy (a) assets. These include both

tangible assets such as (b) and intangible assets such
as (c). To pay for these assets, they sell (d) assets
such as (e). The decision about which assets to buy is
usually called (f) or (g) decision. The decision about
how to raise money is usually called the (h) decision

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 Introduction to Corporate Finance
1-15

Discussion question

What is the most important goal of a

corporation?

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 Corporate Investment and Financing
Decisions
1-16

Two broad decisions to be made

• Investment decision
o What assets to buy
• Financing decision
o How to finance the investments

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 Corporate Investment and Financing
Decisions
1-17

Corporations invest in assets that

generate income
• Tangible assets (physical): plant,
equipment.
• Intangible assets: Brand names, patents.

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 Corporate Investment and Financing
Decisions
1-18

Capital Budgeting

Tangible Assets Intangible Assets

Expand Stores New Drug R&D
@ $800 million @ $800 million

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 Corporate Investment and Financing
Decisions
1-19

Corporations finance their investments by

• Borrowing.
o Short term vs long term
o Bank loan vs bond issue

• Retaining and reinvesting profits or cash

flows
• Selling additional shares

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Corporate Investment and Financing
Decisions
1-20

Assets Firm

Investment Decision

Capital structure decision

• The proportion of assets
financed by .
Debt Equity
o Debt
o Equity
Financing Decision
 Corporate Investment and Financing
Decisions
1-21

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 Corporate Investment and Financing
Decisions
1-22

Question: Are the following investing or financing

decisions?
a. Intel decides to spend $1 billion to develop a new
microprocessor.
b. Volkswagen borrows 350 million euros (€350 million)
from Deutsche Bank.
c. Royal Dutch Shell constructs a pipeline to bring
natural gas onshore from a production platform in
Australia.
d. Avon spends €200 million to launch a new range of
cosmetics in European markets.
e. Pfizer issues new shares to buy a small biotech
company.

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 Role of The Financial Manager
1-23

(2) (1)

Firm's Financial Financial

(4a)
operations manager markets

(3) (4b)

(1) Cash raised from investors

(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
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 The Financial Goal of the Corporation
1-24

Common goal of Stockholders

• Want managers to increase/maximize the
value of the corporation (stock price)
• Maximize profits of the corporation

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 The Financial Goal of the Corporation
1-25

• Profit maximization
oNot a well-defined financial objective
Which year’s profits?
 Shareholders will not welcome higher short-
term profits if long-term profits are damaged
Company may increase future profits by
cutting this year’s dividend, investing
existing cash in the firm

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 The Financial Goal of the Corporation
1-26

Question: What should a company do with

excess cash
• Hold as cash for future investments
• Pay out as dividend
• Repurchase Shares

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 The Financial Goal of the Corporation
1-27

Question: What is opportunity costs?

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 The Financial Goal of the Corporation
1-28

• The investment trade-off

o Cost of capital
Minimum acceptable rate of return on
investment
oOpportunity cost of capital
Investing in a project if the expected rate of
return is higher than the cost of capital
(opportunity cost, the return shareholders
can make themselves for the same level of
risk)

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 The Investment Trade-off
1-29

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 The Financial Goal of the Corporation
1-30

Discussion question:

• What are the most important goals of

management
• How do those goals compare to the goals
of shareholders

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 The Financial Goal of the Corporation
1-31

• Shareholders desire wealth maximization

• “Agency problems” represent the conflict

of interest between management and
owners

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 Agency Problem
1-32

• Do managers maximize shareholder

wealth or manager wealth?

• Agency problem
oManagers are agents for stockholders and
are tempted to act in their own interests
rather than maximizing value

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 Agency Cost
1-33

Agency cost
• When managers don’t seek to maximize
the value of the company
• Shareholders incur costs to monitor
managers and restrict their actions
(example use of expensive company cars
etc)

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