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Lecture 1: Overview of
corporate finance
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Chapter Outline
• Corporate Investment and
1 Financing Decisions

• The Role of the Financial Manager

2 and the Opportunity Cost of Capital

3 • Goals of the Corporation

• Agency Problems and Corporate

4 Governance
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Diamonds mean a longer marriage?

RESEARCH METHODOLOGY IN FINANCE AND ECONOMIC_APR 2021

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Diamonds aren't forever: Why

cheaper engagement rings may mean
awho
Men longer marriage
spent between $2,000 and $4,000 on an
engagement ring had a higher rate of divorce than men who
spent between $500 and $2,000

Spending less than $500 on an engagement ring was found to

be associated with higher divorce rates

Debt resulting from wedding expenses caused stress in their

marriage, and there is sizable literature in economics and
sociology linking economic stress and marital dissolution.

RESEARCH METHODOLOGY IN FINANCE AND ECONOMIC_APR 2021

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Risk and Return

Higher risk = lower returns Higher risk = higher returns

RESEARCH METHODOLOGY IN FINANCE AND ECONOMIC_APR 2021

MAX ANOMALY: Winners 1-6

become Losers

RESEARCH METHODOLOGY IN FINANCE AND ECONOMIC_APR 2021

R&D: What’s for?
1-7

RESEARCH METHODOLOGY IN FINANCE AND ECONOMIC_APR 2021

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Ownership Structure

RESEARCH METHODOLOGY IN FINANCE AND ECONOMIC_APR 2021

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CEO Gender: Risk and Firm Performance

RESEARCH METHODOLOGY IN FINANCE AND ECONOMIC_APR 2021

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Key Terms
➢ Investment decision: Quyết định đầu tư
➢ Financing decision: QĐ tài trợ
➢ Agency Problem: vấn đề đại diện
➢ Agency Cost: CP đại diện
➢ Real assets: Tài sản thực
➢ Capital budget: Ngân sách vốn
➢ Capital Expenditure (CAPX) Chi tiêu vốn
➢ Treasurer: Ngân quỹ
➢ Shareholder: Cổ đông
➢ Dividend: Cổ tức
➢ Compensation: Bồi thường
➢ Stakeholder: các bên liên quan
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Investment and Financing Decisions

➢ Common Finance
Terminology
– Real assets
– Financial assets /
Securities
– Capital markets and
financial markets
– Investment / capital
budgeting
– Financing
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Investment and Financing Decisions

Financial claims to the

Assets used to produce
income generated by
goods and services
the firm’s real assets
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Investment and Financing Decisions

Purchase of Sale of
real assets financial assets
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Investment and Financing Decisions

➢Capital Budgeting
Decision
– Decision to invest in
tangible or intangible
assets.
➢…also called the
Investment Decision
➢…also called Capital
Expenditures or
(CAPEX)
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Investment and Financing Decisions


Investment and Financing Decisions
Company (revenue in billions
for 2007 or 2008)
Boeing ($61 billion)
Royal Dutch Shell ($458 billion)
GlaxoSmithKline (£24 billion)
Wal-Mart ($379billion)
LVMH (€17 billion )
Lenovo ($16 billion)
Recent Investment Decision
Began production of its 787 Dreamliner The cash flow from Boeing’s
aircraft, at a forecast cost of more than
$10 billion.
Invests in a $1.5 billion deep-water oil
and gas field in the .
Spent £3.7 billion in 2008 on research
and development of new drugs.
In 2008 announced plans to invest over
a billion dollars in 90 new stores.
Acquired the Spanish winery, Bodega
Numanthia Termes.
Expanded its chain of retail stores to
cover over 2,000 cities.
1-16
Recent Financing Decision
operations allowed it to repay some
of its debt and repurchase $2.8
billion of stock.
In 2008 returned $13.1 billion of
cash to its stockholders by buying
back their shares.
Financed R&D expenditures largely
with reinvested cash flow generated
by sales of pharmaceutical products.
In 2008 raised $2.5 billion by an
issue of 5-year and 30-year bonds.
Issued a 6-year bond in 2007, raising
300 million Swiss francs.
Borrowed $400 million for 5 years
from a group of banks
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Role of The Financial Manager

(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 Investment Trade-off

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Goals of The Corporation

Each stockholder wants three things:

1. To be as rich as possible, that is, to maximize his or her current

wealth.
2. To transform that wealth into the most desirable time pattern of
consumption either by borrowing to spend now or investing to
spend later.
3. To manage the risk characteristics of that consumption plan.
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Goals of The Corporation

➢ Profit maximization is not a well-defined financial objective, for at least
two reasons:

1. Maximize profits? Which year’s profits? A corporation may be able to

increase current profits by cutting back on outlays for maintenance or staff
training, but that may add value. Shareholders will not welcome higher
short-term profits if long-term profits are damaged.

2. A company may be able to increase future profits by cutting this year’s

dividend and investing the freed-up cash in the firm. That is not in the
shareholders’ best interest if the company earns less than the opportunity
cost of capital.
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Whose Company Is It?

** Survey of 378 managers from 5 countries

3
Japan 97

17
Germany 83

22
France 78

71
United Kingdom 29

76
United States 24

0 20 40 60 80 100 120
The Shareholders
% of responses
All Stakeholders
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Dividends vs. Jobs

** Survey of 399 managers from 5 countries. Which is more important...jobs
or paying dividends?
3
Japan 97

40
Germany 60

41
France 59

89
United Kingdom 11

89
United States 11

0 20 40 60 80 100 120
Dividends
% of responses
Job Security
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Goals of The Corporation

➢ Shareholders desire wealth maximization
➢ Do managers maximize shareholder
wealth?
➢ Mangers have many constituencies
“stakeholders”
➢ “Agency Problems” represent the conflict
of interest between management and
owners
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Agency Problem
Ownership vs. Management
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Agency Problem
➢Agency costs are incurred when:
1. managers do not attempt to maximize firm value and
2. shareholders incur costs to monitor the managers and
constrain their actions.
 The conflict of goals between managers and 1-26

shareholders

26
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Group Activities: Agency Problems

• What is the main reasons of

1 agency cost?

• Example of agency cost?

2

• Could we completely solve agency

3 costs by firing the manager?

27
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Control of Agency Problems

Legal and
Regulatory Takeovers
Requirements

Compensation
Monitoring
plans

Control
Board of Shareholder
Directors Agency pressure
Costs

28
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Question 3
1. Generally, a corporation is owned by the:
I) Managers; II) Board of Directors; III)
Shareholders
A. I only
B. II and III
C. III only
D. I, II and III
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Question 1
2. Finance, generally, deals with:
I) Money; II) Markets; III) People
A. I only
B. I and II only
C. I and III only
D. I, II and III
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Question 2
3. Shareholders of a corporation may be,
among others:
I) Individuals; II) Pension Funds; III)
Insurance Companies
A. I only
B. I and II only
C. II only
D. I, II and III
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Question 4
4. Corporations, potentially, have infinite
life because:
A. it is a legal entity
B. of separation of ownership and
management
C. it has limited liability
D. none of the above
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Question 5
5. Limited liability is an important feature of:
A. Sole proprietorships
B. Partnerships
C. Corporations
D. All of the above
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Question 6
6. The following are examples of intangible
assets except:
A. Building
B. Trademarks
C. Patents
D. Technical expertise
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Question 7
7. The following are examples of tangible
assets except:
A. Machinery
B. Factories
C. Trademarks
D. Offices
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Question 8
8. A firm's investment decision is also
called the:
A. Financing decision
B. Liquidity decision
C. Capital budgeting decision
D. None of the above
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Question 9
9. The following are examples of financial
assets except:
A. Common stock
B. Bank loan
C. Preferred stock
D. Buildings
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Question 11
10. The controller usually oversees the
following functions of a corporation:
I) Preparation of financial statements; II)
Internal accounting; III) Cash management
and IV) Taxes
A. I, II and IV only
B. III only
C. I and II only
D. II and III
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Question 10
10. The treasurer usually oversees the following
functions of a corporation except:
I) Preparation of financial statements; II) Investor
relationships; III) Cash management; IV) raising
new capital
A. I only
B. I and II only
C. II, III and IV only
D. III only
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Question 12
12. The following are important functions of
financial markets:
I) Source of financing; II) Provide liquidity;
III) Reduce risk; IV) Source of information
A. I only
B. I and II only
C. I, II, III, and IV
D. IV only
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Question 13
13. Conflicts of interest between shareholders
and managers of a firm result in:
A. Principal-agent problem
B. Increased agency costs
C. Both A and B
D. Managers owning the firm
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Question 14
14 In the principal-agent framework:
A. Shareholders are the principals
B. Managers are the principals
C. Managers are the agents
D. A and D
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Question 15
15. Costs associated with the conflicts of
interest between the bondholders and the
shareholders of a corporation are called:
A. Legal costs
B. Bankruptcy costs
C. Administrative costs
D. Agency costs
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Question 16
16. Agency costs are incurred by a
corporation because:
A. managers may not attempt to maximize the
value of the firm to shareholders
B. shareholders incur monitoring cost
C. separation of ownership and management
D. all of the above
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Question 17
17. The financial goal of a corporation is to:
A. Maximize profits
B. Maximize sales
C. Maximize the value of the firm for the
shareholders
D. Maximize managers' benefits
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Question 18
18. The purchase of real assets is also referred
to as the:
A. Capital decision
B. CFO decision
C. Financing decision
D. Investment decision
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Question 19
19. The sale of financial assets is also referred
to as the:
A. Capital decision
B. CFO decision
C. Financing decision
D. Investment decision
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Question 20
20.The mixture of debt and equity, used to
finance a corporation is also known as:
A. Capital budgeting
B. Capital structure
C. Investing
D. Treasury