Introduction to Financial

Management
Week 1
IB125 Foundations of Financial Management
Jesús Gorrín
FIRM Plants and Equipment Employees

Property Inventories

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WHAT IS CORPORATE FINANCE?
Investment
 Investment - What do you need to start a firm?

Inventory Machinery Land Labour

 Cash invested in assets must be matched by an equal amount of cash raised by

financing.
 Why are you starting a firm? Finan
cing

Inves
Value
tment Creation
Liquid
ity
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WHAT IS CORPORATE FINANCE?
 Why are you starting a firm?
Corporate Finance

 A corporation can raise money (cash) from

lenders or from shareholders. Investment Financing Liquidity
 If it borrows, the lenders contribute the
cash, and the corporation promises to
pay back the debt plus a fixed rate of ASSETS FIRM
interest (debt financing)
 If the shareholders (equity investors)
put up the cash, they get no fixed return,
but they hold shares of stock and Investment
therefore get a fraction of future profits Decision
Debt Equity
and cash flow. (equity financing)
Financing Decision

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CAPITAL BUDGETING AND STRUCTURE

 Capital Budgeting Decision (also called Investment Decision or Capital

Expenditure (CAPEX) decision )
 Decision to invest in tangible or intangible assets
 Financing Decision
 Decision on the sources and amounts of financing
 Capital Structure
 The mix of long-term debt and equity financing

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CAPITAL STRUCTURE

 The choice between debt and equity financing is called the capital structure
decision.
 Capital refers to the firm’s sources of long-term financing.
 Value of Firm = Value of Bonds + Value of Shares

 Corporations raise equity financing in two ways:

 they can issue new shares of stock. The investors who buy the new shares put
up cash in exchange for a fraction of the corporation’s future cash flow and
profits.
 the corporation can take the cash flow generated by its existing assets and
reinvest the cash in new assets. No new shares are issued.

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FIRM FINANCING

 Corporations raise debt financing in two ways:

 they can get loans from banks.
 They can issue bonds to investors.

 Corporations raise equity financing in two ways:

 they can issue new shares of stock. The investors who buy the new shares put
up cash in exchange for a fraction of the corporation’s future cash flow and
profits.
 the corporation can take the cash flow generated by its existing assets and
reinvest the cash in new assets. No new shares are issued.

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WHAT IS A CORPORATION?

 A business organized as a separate legal entity owned by stockholders

 Types of Corporations
 Public Companies
 Private Corporations
 Limited Liability Corporations (LLC)
 In this course we mainly focus on large public limited-liability companies
 Limited liability: The owners of a corporation are not personally liable for its
obligations

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GOAL OF THE CORPORATION

 Shareholders desire wealth maximization

 Profit maximization
 Maximize profits? Which year’s profits?
 Hard to define profits. Thus, we focus on cash flows.
 Earning manipulation
 Opportunity cost of capital
 The minimum acceptable rate of return on capital investment is set by the
investment opportunities available to shareholders in financial markets
 what we can earn in similar projects.

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GOAL OF THE CORPORATION

 The investment Trade-off

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GOAL OF THE CORPORATION

 The Financial Manager

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AGENCY PROBLEM

 Do managers maximize shareholder wealth or manager wealth?

 Managers have many constituencies “stakeholders”
 Stakeholder: Anyone with a financial interest in the corporation (e.g.,
employees, customers, suppliers, and the communities where the firm’s plants
and offices are located.)
 Agency problem
 Managers are agents for stockholders and are tempted to act in their own
interests rather than maximizing value
 Agency cost
 Value lost from agency problems or from the cost of mitigating agency
problems

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WHAT IS FINANCIAL MANAGEMENT?

 Financial Management studies how companies fund their

operations
 is it worth investing in a project?
 should we consider the risk of the project?
 where does funding come from and at which rate?
 what is the best funding mix?
 how do you value a company?
 should companies pay dividends to their shareholders?
 Exchange risks and their management: use of derivative securities
to control risk

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OTHER TOPICS OF FINANCIAL MANAGEMENT

 Financial markets and instruments

 what instruments can we buy on financial markets?
 how do we value them?
 Informational efficiency of financial markets
 prices of securities traded in financial markets reflect all available relevant
information
 no abnormal returns to be made from observing past prices
 academic evidence largely supports the hypothesis

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MODULE DELIVERY

 We will have 1-hour live online lectures every week (they will be recorded).
 We will have 1-hour worth of pre-recorded material and activities every week
(recorded in smaller chunks).
 One-hour seminar every week (starting from week 3)
 You must attend all seminars (please find more information on my.wbs).
 You need to come prepared to the seminars.
 First 5 weeks will be taught by Dr. Jesús Gorrín and the last 5 weeks by Dr.
Anastasia Lashova Richmond.
 For the first 5 weeks pre-recorded material is designed to be revised after our
weekly lecture.

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MODULE DELIVERY – LECTURE SCHEDULE
Date Lecture
1. Introduction to Financial Management
Week 1
2. Financial Arithmetic
Week 2 3-4. Company Financing
Week 3 5-6. Cost of Capital
Week 4 7-8. Project Appraisal
Week 5 9-10. Capital Structure

Week 6 11-12. Dividend policy

Week 7 13-14. Financial Markets and Market Efficiency

Week 8 15-16. Shareholder Value

Week 9 17-18. Exchange Rates

Week 10 19. Revision Lecture

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MODULE DELIVERY – SEMINAR SCHEDULE
 One-hour seminars every Date Seminar
week. Week 3 Financial Arithmetic
 Times and Locations:
 Please check my.wbs Week 4 Company Financing
for any updates Week 5 Cost of Capital
 You must attend your Week 6 Project Appraisal
seminar group each week.
Week 7 Capital Structure
 Solutions will be posted on
my.wbs after the last Week 8 Dividend Policy
seminar is delivered (i.e. Week 9 Market Efficiency
Friday).
Week 10 Tesco Case Study

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ASSESSMENT
 Assessment:
 Weekly MCQ Quizzes 10%
 Final examination in May/June 90%
 What is examinable?
 Everything that is on lecture slides (even if not mentioned in class)
 All problems from seminars (even if not discussed in class)
 Quizzes
 To be completed in MS Forms. Check your weekly tasks in mini-my or
my.wbs.
 Quizzes will run from Week 1 until Week 9. You have two weeks to complete
them after they have been released (see tasks page for exact weekly deadline).
Before Week 5 there are grace periods to allow for students switching courses,
see tasks in my.wbs for detailed instructions.

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RULES AND EXPECTATIONS

 #HWPO (Hard Work Pays Off, Matt Fraser). This is a 15 CAT course. Translation:
the university and I expect you to study 150 hours to dominate this course.

 Lectures, seminars and pre-recorded material equate 30 hours of work in total. This
means you have to devote on average 120 extra hours of independent active studying.
Make them count! Come prepared to seminars!

 Any questions please drop by the online office hours in Teams (email me for an
appointment, no shows will be given less priority for future appointments).

 Post questions and comments in the forum. I respond very quickly there and
everyone gains. I will not respond individual questions about the course over e-mail.

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TEXTBOOKS
 Main Textbook:
 Hillier, D., Ross, S., Westerfield R., Jaffe, J., and Jordan B. Corporate Finance.
(Fourth European Edition, McGraw-Hill, 2020). Third Edition works fine as
well. I recommend the online version through McGraw Hill Connect. More
exercises, summaries, etc.
 Alternatives:
 Brealey RA, Myers SC & Marcus AJ. Fundamentals of Corporate Finance (9th
edition, McGraw-Hill 2017).
 Pike R, Neale B, Akbar S (with Linsley P.). Corporate Finance and Investment
(9th edition, Pearson 2018).
 Arnold G. Essentials of Corporate Financial Management (5th edition, Pearson,
2012).

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