Ch 1.

Introduction to Corporate
Finance
 1. Corporate Finance
• Def: Corporate Finance (Financial Management) is an area
dealing with Capital budgeting, Capital structure and working
capital Management.
• Capital budgeting is the process of planning and managing a
firm’s long term investments.
• Capital structure is the mixture of debt and equity maintained
by a firm
• Working capital management is about managing short term
assets and liabilities.
Tài chính doanh nghiệp là một phân môn của ngành Tài chính, nghiên cứu về quá trình
hình thành và sử dụng các của cải trong doanh nghiệp nhằm mục tiêu tối đa hóa lợi ích
chủ sở hữu. Mục đích tối đa hóa lợi ích chủ sở hữu là cơ sở quan trọng của lý thuyết tài
chính doanh nghiệp hiện đại. 
What is meant by corporate finance?
Corporate finance is concerned with how businesses fund their
operations in order to maximize profits and minimize costs. It
deals with the day-to-day operations of a business' cash flows
as well as with long-term financing goals (e.g., issuing bonds).
Who is a Finance Manager
 2. Forms of Business Organization
1) sole proprietorship:
• A business is owned by a single owner. Income is taxed as personal
income.

• Advantage:
• - easy and inexpensive to set up
• - owner keeps all profits

• Disadvantage:
• - unlimited liability
• - limited to life of owner
• - limited capability of raising capitals
2) Partnership
• A business is formed by two or more individuals. Income is
taxed as personal income to partners.

• Advantage:
• - easy and inexpensive to set up

• Disadvantage:
• - unlimited liability
• - limited life until the partnership is maintained
• - limited in transferring ownership
• - limited to raise capitals
3) Corporation: a business created as a distinct
legal entity composed of one or more individuals
and entities. Ownership is separated from
management.

• Advantage:
• - easy to raise capital
• - easy to transfer ownership
• - limited liability
• - unlimited life
• Disadvantage:
• - expensive and not easy to set up
• - double taxation: taxes on corporate and shareholders

4) Limited Liability Company (LLC)

• A hybrid of partnership and corporation
• Taxed like partnership but rating limited liability for
owners.

5) Another name of corporation: joint stock companies,

public limited companies, limited liability companies,
 3. Primary Objective of Corporation
• Stock holders elect directors who then hire managers
to run a corporation. Directors and managers are called
“insiders.”
• Goal of management is to maximize the fundamental
or intrinsic price of common stock (shareholder
wealth) rather than the market price. Intrinsic price
reflects all relevant information about cash flows and
risk. But market price reflect only investors’ selection
and interpretation of information.
• Maximizing stock price also benefit social welfare: (1)
owners of stocks are society, (2) Consumer benefit
resulting from high quality and low cost, and (3) more
employee, etc
• However some non US firm (European) has board of
directors representing the interests of employees or
government, not juts only shareholders.
• Benefit corporation (B corporation) which expands
fiduciary responsibilities including interests other
than shareholders. E.g.) Big Bad Wolf (B Corp)
mandates to help the environment and society. The
Big Bad Wolf, which sells products for companion
pets, seeks to purchase merchandise from small,
local, minority-owned businesses even if their
prices are a bit higher.
• Environmental, social, and governance (ESG) criteria are a
set of standards for a company’s behavior used by socially
conscious investors to screen potential investments.
Environmental criteria consider how a company safeguards
the environment, including corporate policies addressing
climate change, for example. Social criteria examine how it
manages relationships with employees, suppliers,
customers, and the communities where it operates.
Governance deals with a company’s leadership, executive
pay, audits, internal controls, and shareholder rights.
• (
https://www.investopedia.com/terms/e/environmental-soci
al-and-governance-esg-criteria.asp
)
 5. Agency problem and control of
corporation
1) agency relationship: a relation in which one hires others
to represent one’s interest.
• E.g) stock holders and managers

2) agency problem: the possibility of conflict of interest

between the stock holders and management of the firm.
• E.g) a renovation project benefiting managers but costing
stockholders.
• E.g) a very risk project benefiting stockholders but risking
the position of the management.
3) agency costs: cost of conflict on interest
between stockholders and managers.

Two types of agency costs:

(1) indirect cost: lost investment opportunities.
(2) direct cost:
• - corporate expenditure benefiting managers
but costing stockholders
• - an expense in order to monitor the managers’
behavior.
4) how to align interest of management with that of
share (stock) holders?

- Compensation basing on the performance

• (e,g) stock option to employee
• (e.g) salaries

- Control of the firm: manager replacement

• (e.g) proxy fight to step down managers
• (e.g) takeover leading to replace the existing managers
with new managers.
5) Stakeholders: someone other than a
stockholder or creditor who potentially has a
claim on the cash flows of the firm. E.g)
employees, customers, suppliers, government.
These groups exert control over the firm.
 5. Financial markets and corporation
• Financial markets in which corporations can raise capitals by
selling equities or borrowing.

• Primary market: original sale of equity or debt by

corporations or government
• - public offering registering with SEC(Securities and Exchange
Commissio-uỷ ban chứng khoán và sàn giao dịch Mỹ)
• - private offering not registering with SEC

• Secondary market: the market where securities are bought

and sold after the original sale. E.g) NYSE
• Dealer versus Auction Markets
- Dealer market (over-the-counter): dealers who own
securities are connected electronically.
- Auction market: it has physical location and match
those who wish to sell with those who wish to buy.
• Trading in corporate securities: NYSE, AMEX, OTC,
NASDAQ
• Listing: stocks that trade on an organized exchange are
said to be listed on that exchange. To be listed, firms
must meet certain minimum criteria concerning, for
example, asset size, number of shareholders, etc.