CORPORATE FINANCE 1

FIN 300

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• Ass.Prof. Le, Duc Hoang, PHD.
leduchoang@neu.edu.vn,
hoangnhtc.neu@gmail.com;

• Office hours: 09:00-11:00, Friday, Room

9.21,A1- School of Finance and Banking

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1. General Information

- Course number: FIN 300

- Title: Corporate Finance 1

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2. Catalog Description

• Introductory course for all business majors.

Topics covered in this course:
(1) Financial Statements and Analysis;
(2) Time Value of Money;
(3) Valuation

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 3. Required Text
Fundamentals of corporate finance The 12th
Edition, standard edition, by Stephen
Ross; Randolph Westerfield Bradford; Jordan
Gordon Roberts

4. Supplemental readings
Fundamentals of Financial Management The
12th Edition, by Eugene F. Brigham and Joel
Houston

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5. Calculator

• strongly encouraged: a financial calculator

or laptop
• List of calculators you can use:
➢ HP 10B
➢ HP 12c
➢ Or more capable business calculators.

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6. Course Objectives
• This is a required course for all business
majors
• provides students with an understanding of
financial management in corporate
environment.
• Critical Thinking Learning Goal
• Business Functions Learning Goal
• Quantitative and Technical Skills Learning
Goal

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 Grading

Grade Based on Total Percentage Points

Participation………………. . 10
Assignment............................ 10 Excellent 90+
1st Exam+2nd Exam............... 40 Good 75-89.9
Final Exam …………..…..….40 Average 60-74.9
Total Points………………….100 Passing 50-59.9
Fail Below 50

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TURN IT IN

• Class ID: 41911140

• Enrollment key: chamchi
❖Assigment

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Chapter Outline

1.1 Why Study Finance? What is CF?

1.2 The Four Types of Firms
1.3 The Financial Manager
1.4 The Stock Market
1.5 Financial Institutions

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1.1 Why Study Finance?
• Individuals are taking charge of their
personal finances with decisions such as:
– When to start saving?
– Whether a car loan or lease?
– Whether a particular stock is a good
investment?
– How to evaluate the terms of a home mortgage?

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1.1 Why Study Finance?

• In your business career, you may face such

questions such as:
– Which supplier should your firm choose?
– Should your firm issue new stock or borrow
money instead?
– How can you raise money for your start-up firm?

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What is Corporate Finance?
Corporate Finance addresses the following
three questions:
1. What long-term investments should the firm
engage in?
2. How can the firm raise the money for the
required investments?
3. How much short-term cash flow does a company
need to pay its bills?

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The Balance-Sheet Model of the Firm

Total Value of Assets: Total Firm Value to Investors:

Current
Liabilities
Current
Assets Long-Term
Debt

Fixed Assets
1 Tangible Shareholder
2 Intangible s’ Equity

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The Balance-Sheet Model of the Firm

The Capital Budgeting Decision

Current
Liabilities
Current
Assets
Long-Term
Debt

Fixed Assets What long-

term
1 Tangible investments Shareholder
2 Intangible should the s’ Equity
firm engage
in?
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The Balance-Sheet Model of the Firm

The Capital Structure Decision

Current
Liabilities
Current
Assets
Long-Term
How can the Debt
firm raise the
money for the
Fixed Assets
required
1 Tangible investments? Shareholder
2 Intangible s’ Equity

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The Balance-Sheet Model
of the Firm

The Net Working Capital Investment Decision

Current
Liabilities
Current
Net
Assets Working
Capital
Long-Term
Debt

How much
Fixed Assets
short-term cash
1 Tangible flow does a
company need Shareholder
2 Intangible to pay its bills? s’ Equity

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1.2 The Four Types of Firms

1. Sole Proprietorships
2. Partnerships
3. Limited Liability Companies
4. Corporations

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1.2 The Four Types of Firms
• Sole Proprietorship
–Straightforward and many new
businesses use this organizational
form
–Principal limitation is that there is no
separation between the firm and the
owner
•The firm can have only one owner

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1.2 The Four Types of Firms

• Sole Proprietorship
– The owner has unlimited personal liability for
any of the firm’s debts
– The life of a sole proprietorship is limited to the
life of the owner
– It is difficult to transfer ownership of a sole
proprietorship

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1.2 The Four Types of Firms

• Partnership
– More than one owner
– All partners are liable for the firm’s debt
– The partnership ends on the death or withdrawal
of any single partner
– Partners can avoid liquidation if the partnership
agreement provides for alternatives such as a
buyout of a deceased or withdrawn partner

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1.2 The Four Types of Firms

• Partnership
– A limited partnership is a partnership with two
kinds of owners, general partners and limited
partners
• Limited Liability Companies (LLC)
– No general partner
– All the owners have limited liability, but they can
also run the business

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1.2 The Four Types of Firms
• Corporations
– A corporation is a legally defined, artificial being,
separate from its owners
– A corporation is solely responsible for its own
obligations
– The corporation is not liable for any personal
obligations of its owners
– Formation of a Corporation
• Must be legally formed

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1.2 The Four Types of Firms

• Corporations
– Formation of a Corporation
• Must be legally formed
– Ownership of a Corporation
• An owner of a share of stock in the corporation
is known as a shareholder, stockholder, or
equity holder
– A corporation’s profits are subject to taxation
separate from its owners’ tax obligations
– Shareholders of a corporation pay taxes twice

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A Comparison of Partnership
and Corporations
Corporation Partnership

Liquidity Shares can easily be Subject to substantial

exchanged. restrictions.

Voting Rights Usually each share General Partner is in

gets one vote charge; limited
partners may have
some voting rights.
Taxation Double Partners pay taxes on
distributions.
Reinvestment and Broad latitude All net cash flow is
dividend payout distributed to partners.

Liability Limited liability General partners may

have unlimited liability.
Limited partners enjoy
limited liability.
Continuity Perpetual life Limited life

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Figure 1.1: Types of U.S. Firms

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1.3 The Financial Manager

• The financial manager has three main

tasks:
– Make investment decisions
– Make financing decisions
– Manage cash flow from operating activities

• The Goal of the Financial Manager

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The Financial Manager’s Place
in the Corporation

• Stockholders own the corporation but rely

on financial managers to actively manage
the corporation
• The Corporate Management Team
– Board of Directors
– Chief Executive Officer (CEO)

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Figure 1.2 The Financial Functions
Within a Corporation

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Separation of Ownership and Control

Board of Directors

Debtholders

Shareholders
Management

Debt
Assets
Equity

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 Conflicts Between Managers and
Stockholders

• Managers are naturally inclined to act in

their own best interests

• But some factors affect managerial

behavior.

• State-owned enterprise

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 Conflicts Between Stockholders
and Bondholders
• Stockholders are more likely to prefer
riskier projects, because they receive more
of the upside if the project succeeds.
• Bondholders are particularly concerned
about the use of additional debt.
• Bondholders attempt to protect themselves
by including covenants in bond agreements

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1.4 The Stock Market

• Corporations can be private or public

– A private corporation has a limited number of
owners
– A public corporation has many owners and its
shares trade on an organized market.

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 The Firm and the Financial Markets

Firm Firm issues securities (A) Financial

markets
Invests
Retained
in assets cash flows (F)
(B)
Short-term debt
Current assets Cash flow Dividends and Long-term debt
Fixed assets from firm (C) debt payments (E)
Equity shares

Taxes (D)
The cash flows from
Ultimately, the firm
the firm must exceed
must be a cash the cash flows from
generating activity. Government
the financial markets.
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Financial Markets

• Over-the-Counter Stock Markets

– Dealer Markets
• NASDAQ

• Listing Standards
• The NYSE’s listing standards are more stringent than
those of NASDAQ

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Financial Markets
– Bond Market
– Foreign Exchange Market
– Commodities Market
– Derivative Securities

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 1.4 Financial Markets

Primary Market
– When a corporation issues securities
Secondary Markets
– Involve the sale of “used” securities from one
investor to another.

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Financial Markets

• Primary Versus Secondary Markets

• Physical Stock Markets
– Auction Market
• NYSE
– Market Makers
• Specialists
– Bid-Ask Spread
• Bid price
• Ask price
• Transaction Cost

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1.4 The Stock Market

Stocks and
Investors
Bonds
Firms securitie
Money Bobs Sue
money

Primary Market
Secondary
Market

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1.5 Financial Institutions

• Financial Institutions
– Entities that provide financial services, such as
taking deposits, managing investments,
brokering financial transactions, or making loans
• The Financial Cycle
– In the financial cycle:
1. People invest and save their money
2. Through loans and stock, that money flows to
companies who use it to fund growth through new
products, generating profits and wages
3. The money then flows back to the savers and
investors

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Figure 1.4 The Financial Cycle

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1.5 Financial Institutions

• Types of Financial Institutions

– Banks and Credit Unions
– Insurance Companies
– Mutual Funds
– Pension Funds

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Function of Financial Markets
Figure Flows of Funds Through the Financial System

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