Chap.

Introduction to
Corporate Finance

1
 2

What is Corporate
Finance?
• Corporate Finance addresses the following
three questions:
• What long-term investments should the
firm choose?
• How should the firm raise funds for the
selected investments?
• How should short-term assets be
managed and financed?
 3

Balance Sheet Model

of the Firm
Total Value of Assets: Total Firm Value to Investors:
Current
Current Assets Liabilities
Long-Term
Debt
Fixed Assets
1 Tangible Shareholders’
2 Intangible Equity
 4

The Capital Budgeting

Decision
Current
Liabilities
Current Assets
Long-Term
Debt
What long-term
Fixed Assets
investments Shareholders’
1 Tangible
should the firm Equity
2 Intangible choose?
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The Capital Structure

Decision
Current
Liabilities
Current Assets
Long-Term
How should the Debt
Fixed Assets firm raise funds
1 Tangible for the selected Shareholders’
investments? Equity
2 Intangible
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Short-Term Asset
Management
Current
Liabilities
Current Assets
Net Working Capital Long-Term
Debt
Fixed Assets How should
1 Tangible short-term assets Shareholders’
be managed and Equity
2 Intangible
financed?
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Capital Structure
• The value of the firm can be thought
of as a pie.

• The goal of the manager is to

increase the size of the pie.

• The Capital Structure decision can

be viewed as how best to slice the
pie.

• If how you slice the pie affects the

size of the pie, then the capital
structure decision matters.
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The Financial Manager

Responsible for Responsible for

Responsible for
Investment Short-Term
Financing Decisions
Decisions Financial Planning

Oversee
Ensure the Financial
Accounting and
Welfare of the Firm
Audit
 9

The Goal of Financial

Management
 10

The Firm and the

Financial Markets
Firm issues securities (A)

Retained
Financial
Firm cash flows (F)
Markets
Cash flow Dividends and
from firm (C) debt payments (E)

Taxes (D)

Ultimately, the firm The cash flows from the firm

must be a cash Government must exceed the cash flows
generating activity. from the financial markets.
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Financial Markets

Money Markets Capital Markets

Short-Term Long-Term
Debt Debt and Equity
 12

Financial Markets

• Primary Market
• Issuance of a security for the first time
• Secondary Markets
• Buying and selling of previously issued
securities
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Financial Markets

Stocks and Bonds Investors

Firms securities
Money Bob Sue
money

Primary Market
Secondary Market
 14

Examples of Stock
Exchanges
New York Stock London Stock
Euronext
Exchange Exchange

Shanghai Stock Tokyo Stock

Exchange Exchange
 15

Corporate Finance in Action: Google

Early days
Great Idea
Received Funding

The Share Issue

Needed to Expand Further
Stock Market Listing

Google Now
Multinational Company
A Class and B Class Shares
 16

So What is Finance?

The Investment Decision

The Financing Decision

Short-term Capital
Management