Chapter 1

Introduction to Corporate Finance

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts and Skills
 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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Chapter 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 (bỏ)

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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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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
Shareholders’
2 Intangible Equity

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The Capital Budgeting Decision
Current
Liabilities
Current
Assets Long-Term
Debt

Fixed Assets
What long-term
1 Tangible investments
Shareholders’
should the firm
2 Intangible choose? Equity

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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
Shareholders’
2 Intangible 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 assets
1 Tangible be managed and
financed? Shareholders’
2 Intangible 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
 The Sole Proprietorship – cty tư nhân
 The Partnership
 General Partnership – trách nhiệm VÔ HẠN
 Limited Partnership – Trách nhiệm HỮU HẠN
 The Corporation – cty cổ phần – dễ tiếp cận
nguồn vốn và huy động vốn

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A Comparison
  Corporation Partnership

Liquidity Shares can be easily Subject to substantial

(tính thanh khoản) exchanged restrictions

Voting Rights Usually each share gets one General Partner is in charge;
vote limited partners may have
some voting rights

Taxation Double ( thuế cty & thuế cổ tức, Partners pay taxes on
Chú ý nhe trả về cho người mua cổ phần bị distributions (phân phối)
thuế)
Reinvestment and dividend Broad latitude All net cash flow is
payout distributed to partners

Liability Limited liability General partners may have

Trách nhiệm nợ unlimited liability; limited
partners enjoy limited
liability
Continuity – vòng đời Perpetual life Limited life

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1.3 The Importance of Cash Flow
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)

Ultimately, the firm The cash flows from

must be a cash the firm must exceed
Government
generating activity. the cash flows from
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? (Tối đa hóa tài
sản của cổ đông)

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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 (khoản thu nhập expensive)
 Survival
 Independence
 Increased growth and size are not necessarily
equivalent (tương đương) to increased shareholder
wealth

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 Managing Managers
 Managerial compensation (đền bù)
 Incentives (khuyến khích) can be used to align (căn
chỉnh) management and stockholder interests
 The incentives need to be structured carefully to make
sure that they achieve their intended goal (mục tiêu dự định)
 Corporate control
 The threat of a takeover may result in better management
 Other stakeholders

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 1.6 Regulation
 The Securities Act of 1933 and the Securities
Exchange Act of 1934
 Issuance of Securities (1933)
 Creation of SEC and reporting requirements (1934)
 Sarbanes-Oxley (“Sarbox”)
 Increased reporting requirements and responsibility of
corporate directors

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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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