Course 1

Introduction to Corporate Finance

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 Key Skills in CF
Know the basic types of financial management
decisions and the role of the Financial Manager
Know the financial implications of the various
forms of business organization
Know the goal of financial management
Understand the conflicts of interest that can
arise between owners and managers
Understand the various regulations that firms
face

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 Outline
1.1 What is Corporate Finance?
1.2 The Corporate Firm
1.3 The Importance of Cash Flows
1.4 The Goal of Financial Management
1.5 The Agency Problem and Control of the
Corporation
1.6 Regulation

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1.1 What Is Corporate Finance?

Corporate Finance addresses the following

three questions:
1. What long-term investments should the firm
choose?
2. How should the firm raise funds for the
selected investments?
3. How should short-term assets be managed and
financed?

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1.1 What Is Corporate Finance?
• Financial managers try to answer some or all of
these questions
• The top financial manager within a firm is usually
the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting and data processing

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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 Capital Budgeting Decision

Current
Liabilities
Current
Assets Long-Term
Debt

Fixed Assets
What long-
1 Tangible term
Shareholder
investments
2 Intangible should the s’ Equity
firm choose?
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The Capital Structure Decision

Current
Liabilities
Current
Assets Long-Term
How should the Debt
firm raise funds
for the selected
Fixed Assets
investments?
1 Tangible
Shareholder
2 Intangible s’ Equity

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Short-Term Asset Management

Current
Liabilities
Current
Net
Assets Working Long-Term
Capital Debt

How should
Fixed Assets
short-term
1 Tangible assets be
managed and Shareholder
2 Intangible financed? s’ Equity

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 The Financial Manager
The Financial Manager’s primary goal is to
increase the value of the firm by:
1. Selecting value creating projects
2. Making smart financing decisions

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 Hypothetical Organization Chart
Board of Directors

Chairman of the Board and

Chief Executive Officer (CEO)

President and Chief

Operating Officer (COO)

Vice President and

Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager Credit Manager Tax Manager Cost Accounting

Capital Expenditures Financial Planning Financial Accounting Data Processing

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 1.2 The Corporate Firm

• The corporate form of business is the

standard method for solving the problems
encountered in raising large amounts of cash.
• However, businesses can take other forms.

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 Forms of Business Organization
(international practice/forms- US)
• The Sole Proprietorship
• The Partnership
- General Partnership
- Limited Partnership
• The Corporation:
- C-Corp
- S-Corp
- Limited Liability Company
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Forms of Business Organization –
in Romania
1) The Romanian Limited Liability Company – “Societate
cu Raspundere Limitata” (SRL)
2) The Romanian Joint-Stock Company – “Societate pe
Actiuni”
3) The Romanian “Collective-Name Company”
(Societatea in Nume Colectiv)
4) The Romanian “Sleeping Partnership Company” –
“Societate in Comandita Simpla”
5) The Romanian “Partnership Limited by Shares”
Company – Societatea in Comandita pe Actiuni

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 Corporation
• Advantages • Disadvantages
– Limited liability – Separation of
– Unlimited life ownership and
– Separation of management
ownership and – Double taxation
management (income taxed at
– Transfer of the corporate rate
ownership is easy and then
dividends taxed at
– Easier to raise
the personal rate)
capital

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 A Comparison
  Corporation Partnership

Liquidity Shares can be easily Subject to substantial

exchanged restrictions

Voting Rights Usually each share gets General Partner is in

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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1.3 The Importance of Cash Flow
Firm issues securities (A)

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 Government the cash flows from
generating activity. the financial markets.
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1.4 The Goal of Financial Management

• What is the correct goal?

– Maximize profit?
– Minimize costs?
– Maximize market share?
– Maximize shareholder wealth?

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 1.5 The Agency Problem
• Agency relationship
– Principal hires an agent to represent his/her
interest
– Stockholders (principals) hire managers (agents) to
run the company
• Agency problem
– Conflict of interest between principal and agent

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 Managerial Goals
• Managerial goals may be different from
shareholder goals
– Expensive perquisites
– Survival
– Independence
• Increased growth and size are not necessarily
equivalent to increased shareholder wealth

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 Managing Managers
• Managerial compensation
– Incentives can be used to align management and
stockholder interests
– The incentives need to be structured carefully to
make sure that they achieve their intended goal
• Corporate control
– The threat of a takeover may result in better
management
• Other stakeholders

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 1.6 Regulation
• In Romania: Law no. 31 of November 16, 1990
on Companies
• Total number of active firms (all forms) in
Romania (Q4 2019) : 1.358.729, out of which
225,980 companies with shares abroad in the
share capital

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 Ethics Issues
• Is it ethical for tobacco companies to sell a product that is
known to be addictive and a danger to the health of the user?
Is it relevant that the product is legal?
• Should boards of directors consider only price when faced
with a buyout offer?
• Is it ethical to concentrate only on shareholder wealth, or
should stakeholders as a whole be considered?
• Should firms be penalized for attempting to improve returns
by stifling competition (e.g., Microsoft)?

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 Quick Quiz
• What are the three basic questions Financial
Managers must answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
• What are agency problems, and why do they
exist within a corporation?
• What major regulations impact public firms?

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 Direct foreign investments (1) –
https://trade.ec.europa.eu/doclib/docs/2019/march/tradoc_157724.pdf

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 Direct foreign investments (2) –
https://trade.ec.europa.eu/doclib/docs/2019/march/tradoc_157724.pdf

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 Direct foreign investments (3) –
https://trade.ec.europa.eu/doclib/docs/2019/march/tradoc_157724.pdf

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Companies in RO – sursa: wall-street.ro

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Companies in RO – sursa: wall-street.ro

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Companies in RO– sursa: wall-street.ro

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Companies in RO – sursa: ZF

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 Companies in RO
https://brandfinance.com/im
ages/upload/romania_50_ro
m_free_1.pdf

Calculation of brand strength, using a balance of

attributes that measures Marketing Investment,
Stakeholder Equity, and Business Performance.
The strength of the brand is expressed by a score -
Brand Strength Index (BSI) - on a scale from 0 to
100.
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