Introduction to Corporate
Finance
Chapters 1 & 2
1
Learning Objectives
1. Know the basic types of financial
management decision, and the role of
the financial manager.
2. Appreciate the goal of financial
management.
3. Understand how financial markets
work and the reason they exist.
Overview of Lecture
1. Corporate Finance and the Financial Manager
2. The Goal of Financial Management
3. Financial Markets and the Corporation
1. What is Corporate Finance?
1. Investment
What long term investments will you make? E.g. buildings
2. Financing
Where will you get long-term financing for your long term
projects? E.g. debt
3. Liquidity
How will you manage your everyday activities? E.g. pay suppliers
1. The Financial Manager
Responsible for Responsible for
Responsible for
Investment Short-Term
Financing Decisions
Decisions Financial Planning
Oversee
Ensure the
Accounting and
Financial Welfare of
Audit Function in
the Firm
Firm
1. Corporate Organization Chart
1. The Professions
Qualified accountants e.g. ICAEW, CIMA, ACCA, CIPFA
Taxation e.g. Chartered Institute of Taxation, Association of Taxation
Technicians
Treasury e.g. Association of Corporate Treasurers (ACT)
Financial Analyst e.g. CFA Institute
Chartered Institute for Securities & Investment (CISI)
o Investment operations
o Wealth management
o Compliance & risk
o Islamic finance
o Financial planning
7
1. Financial Management
Decisions
8
1. Capital Budgeting
The process of planning and managing a firms
long-term investments.
Identify investment opportunities that are
worth more to the firm than they cost to
acquire
Financial managers must be concerned not
only with how much cash they expect to
receive, but also with when they expect to
receive it and how likely they are to receive it.
1. Capital Structure
The mixture of long-term debt (borrowing)
and equity (owners investment) maintained
by a firm.
1. How much should the firm borrow?
2. What are the least expensive sources of
funds for the firm?
The financial manager also has to decide
exactly how and where to raise the money.
1. Working Capital Management
The management of a firms short-term assets and
liabilities.
How much cash and inventory should we keep on hand?
Should we sell on credit? If so, what terms will we offer,
and to whom will we extend them?
How will we obtain the short-term financing?
2. The Goal of Financial Management
Maximize
Manage Share
Risk Price
Avoid
Financial
Distress
Maximize Value of Owners Equity
2. The Goal of Financial Management
Maximize the current value of the companys equity
There is no short run vs. long run. The share price should incorporate
expectations about the future of the company and consider the trade-off
between short-run and long-run profits.
The purpose of a for-profit business should be to make money for its owners.
Maximizing the current share price increases the wealth of the owners of the
firm.
Same as maximizing owners equity for non-listed firms.
Non-profits can also follow the same principle, but their owners are the
constituencies that they were created to help.
13
3. Financial Markets and the
Corporation
14
3. Cash Flowing Through the System
3. Cash Flowing Through the System
Cash is the lifeblood of a company.
Cash comes into the firm from the sale of debt and equity.
The money is used to purchase assets.
Those assets generate cash that is used to pay stakeholders, reinvest
in additional assets, repay debt holders, and pay dividends to
shareholders.
16
3. Primary vs. Secondary Markets
Primary Markets Secondary Markets
Money that is
Securities are Investors trade Money that is
raised goes to
sold to investors securities with raised goes to
issuing firm
each other seller of securities
First share issue is Second Share
called an Initial Issue is called a
Public Offering seasoned offering Share Prices
3. How Markets Work
Dealer Market Agency Market
Sell to dealer for Hire agent to sell
Trade 100 Hire for you
Dealer sells for 110 Agent sells for
Trade Trade 110
Profit to Dealer = Agent charges
Profit 10 Profit commission of 10
3. Examples of Stock Exchanges
New York
London Stock
Stock Euronext
Exchange
Exchange
Shanghai
Tokyo Stock
Stock
Exchange
Exchange
Corporate Governance
Chapter 2
See [1b corporate governance.pptx]
20
