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Introduction Corporate
to
Corporate Finance ∙
Finance
Ross Westerfield Jaffe
∙
1
Sixth Edition
Prepared by
Gady Jacoby
University of Manitoba
and
Sebouh Aintablian
American University of
Beirut
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 Text
What is Corporate Finance?
Current
Liabilities
Current Assets
Long-Term
Debt
Fixed Assets
1 Tangible Shareholders’
2 Intangible Equity
The Balance-Sheet Model of the Firm
The Capital Budgeting Decision
Current
Liabilities
Current Assets
Long-Term
Debt
How much
Fixed Assets
short-term cash
1 Tangible flow does a Shareholders’
company need to
2 Intangible Equity
pay its bills?
Capital Structure
If how you slice the pie affects the size of the pie,
then the capital structure decision matters.
Hypothetical Organization Chart
Board of Directors
Treasurer Controlle
r
Taxes (E)
The cash flows from
Ultimately, the firm
the firm must exceed
must be a cash Government
the cash flows from
generating activity.
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
fixed dollar amount by a certain date.
• The shareholder’s 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
Payoff to Payoff to
debt holders shareholders
If the value of the firm If the value of the
is more than $F, debt firm is less than $F,
holders get a share holders get
maximum of $F. nothing.
$F
$F $F
Value of the firm (X) Value of the firm (X)
Voting Rights Usually each share gets one General Partner is in charge;
vote limited partners may have
some voting rights.
Board of Directors
Debtholders
Shareholders
Managemen
t
Debt
Asset
s Equity
The Agency Problem
Direct finance
Primary Market
Secondary
Market
1.6 Trends in 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
I. Overview
II. Value and Capital Budgeting
III. Risk
IV. Capital Structure and Dividend Policy
V. Long-Term Financing
VI. Options, Futures, and Corporate Finance
VII. Financial Planning and Short-Term Finance
VIII. Special Topics