Chap 1

Tuesday, 2 January 2024 13:18

Finance:
- Financial Market: forecast exchange rate, interest rates -> decide transactions…
- Investments: -> portfolio Management: how many bonds, stocks, shares,…
- Financial Management (Corporate Finance) => businesses.
1) Financial Decisions. - 3 kinds
The capital Budgeting Decision

Fixed assets:
Long- term investment? ------making decisions-------> "investment decision": e.g. buy
Long-term debts + Shareholders' equity:
Funds/ financing sources? -----------------> "financing decision" - quyết định tài trợ (ca
Current assets + Current liabilities:
Working Capital management -----------------> "WCM decision".
Net Working Capital (NWC) = current assets - current liabilities.
= (cash + account receivable + inventory + other current
y machines, extend production, launch new products <tangible/ intangible> (capital budgeting

apital structure, %debt/%equity).

t assets) - (account payable + notes + other current liabilities).

g/ capital expenditure).
Current assets + Current liabilities:
Working Capital management -----------------> "WCM decision".
Net Working Capital (NWC) = current assets - current liabilities.
= (cash + account receivable + inventory + other current

-----------------v------------------- -----------------v-------------------
daily forecast - cash in/ cash out | 3 months. record historical transactions
cash in > cash out -> surplus cash -> prepare f. statements, tax reports,…
cash in < cash out -> short term sources (notes,
loans, account payable).
2) Forms of businesses.
Sole proprietorship:
- Owned by an individual.
- The owner is subject to unlimited personal liability.
Partnership:
- Two or more people doing business together.
- All partners are subject to unlimited personal liability.
Corporation:
- A legal entity created bylaw & it is separate from its owners.
- Owners are subject to limited personal liability.
t assets) - (account payable + notes + other current liabilities).

…
-> investment decision: both
-> financing decision: both
-> WCM decision: both
---in general---> corporation is more complex
3) Objective of Corporate Finance.
The importance of Cash Flow

Cash flow:
+ E (interest, payments, principles, dividends) > A: good, generate more.
The goal of Financial Management
Objectives:
- Maximize profit.
+ max revenue -> sell products with losing credit policy. -> AR
+ min cost
+ LIFO, FIFO
- Minimize costs. -> cut down R&D -> bad impact on future
- Maximize market share # win over competitors. e.g. reduce price
 - Maximize profit.
+ max revenue -> sell products with losing credit policy. -> AR
+ min cost
+ LIFO, FIFO
- Minimize costs. -> cut down R&D -> bad impact on future
- Maximize market share # win over competitors. e.g. reduce price
- Reduce risks. -> no
- Maintain the earning growth. -> not good. Sell an important business
- Risk of bankruptcy/ Survivals. -> debt financing has benefits (debt -> interest pa
- Maximize stock price. - primary goal
A (no debt) B (debt:200$,10%)
Revenue (100% cash) 1000 1000
Cost (100% cash) 300 700
Income before interest and tax 700 700
Interest 0 50
Earnings before tax 700 650
Tax (30%) 210 195 -> 15$ tax saving
EAT 490 455
CF to investors (share/stockholder) 490 + 0 = 490 455 + 50 = 505
Wealth = n*P (P tăng -> wealth tăng) => + maximise stock price/ + maximise sharehol
=> measure: valuation < how to make decisions > => chapter 4
Incorporate:
- CF: magnitude of CF
- Times
- Risk
4) Agency problem/ Interest conflicts between owners of firms and manager

Management Team -> their own interests at expense of shareholders

ayments -> save tax -> tax shield)

lder's wealth/ + max firm value = debt + equity

rs.
Management Team -> their own interests at expense of shareholders
-> agency problem
-> conflict of interest
AT HOME: HOW TO MITIGATE THE PROBLEM? Any method incentive?