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Chapter 1 PDF
Chapter 1 PDF
Chapter 1 PDF
Chapter 1
Introduction to Corporate Finance
Chapter Outline
1.1 What is Corporate Finance?
1.2 The Corporate Firm
1.3 The Goal of Financial Management
1.4The Agency Problem and Control of the Corporation
Balance Sheet Model of the Firm
Total Value of Assets: Total Firm Value to Investors:
Current
Liabilities
Current Assets
Long-Term
Debt
Fixed Assets
1 Tangible
Shareholders’
2 Intangible Equity
The Capital Budgeting Decision
Current
Liabilities
Current Assets
Long-Term
Debt
Fixed Assets
What long-term
1 Tangible investments Shareholders’
should the firm
2 Intangible Equity
choose?
( capital budgeting,
investment decision)
The Capital Structure Decision
Current
Liabilities
Current Assets
Long-Term
How should the Debt
firm raise funds
for the selected
Fixed Assets
investments?
1 Tangible ( capital structure, or
Shareholders’
2 Intangible financing decision) Equity
Short-Term Asset Management
Current
Liabilities
Current Assets
Net
Working Long-Term
Capital Debt
How should
Fixed Assets
short-term assets
1 Tangible be managed and
financed? Shareholders’
2 Intangible Equity
1.1 What Is Corporate Finance?
Corporate Finance addresses the following three questions:
1. What long-term investments should the firm choose?
( capital budgeting decision, or investment decision)
2. How should the firm raise funds for the selected investments?
( capital structure decision or financing decision)
The Partnership
• General Partnership: Each partner is liable for all of the debts of the partnership
• Limited Partnership : require that (1) at least one partner be a general partner and (2) the
limited partners do not participate in managing the business
The Corporation ( joint stock company, public limited company, or limited liability company)
: is a legal entity that is separate and distinct from its owners
A Comparison
Corporation Partnership
Voting Rights Usually each share gets one General Partner is in charge;
vote limited partners may have
some voting rights
• Minimize cost?
• Survive?
• Profits are not cash flows. We are actually more interested in cash
flow.
• Having a large market share may not translate into higher profits if
the firm cannot increase revenue much more by increasing prices
1.4 Goal of Finance - Maximizing shareholder wealth?
Agency problem
• Conflict of interest between principal and agent
Agency cost
• Agency cost : refers to the costs of the conflict of interest between
stockholders and management. These costs can be indirect or direct.
• Direct agency costs :
- Firm expenditure that benefits management but costs the stockholders
- Monitoring cost
• The incentives need to be structured carefully to make sure that they achieve
their intended goal
Corporate control
• The threat of a takeover may result in better management
Other stakeholders
Quick Quiz
• What are the three basic questions Financial Managers must answer?
• What are agency problems, and why do they exist within a corporation?
Key Concepts and Skills
Know the basic types of financial management decisions and the role of
the Financial Manager
Understand the conflicts of interest that can arise between owners and
managers ( agency problem)