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Corporate Finance
South Texas College of Law Houston
Rosin, Gary S.

First Week

Corporate Finance

Shareholders ownership idea – role of corporation to enhance SH value, the board can decide to spend incidental to enhancing SH value

Theory of the firm – why certain kinds of firms have certain kinds of structure

Nexus of contracts – web of contracts









Harder to reduce agency costs
Principal (if company liquidates)(never happens)

No right to payment
Only if creditors are paid

Income (dividends)

No right to payment

No default risk b/c not promised anything, but are at risk of not getting anything b/c they are last to eat

Only group that risks getting nothing back
Least subject to contract and most vulnerable b/c risk of getting nothing



Risk – default
Principal – payment, fixed date
Income – interest payable regularly


Regular payment
Risk – default
Risk – harm


This kind of shatters the SH as owner of the firm theory in that nobody really owns the firm they just have a contract w/ the firm
Firms are subject to the economic environment of the products they sell and the structure of the firm
Nature of the inputs
Agency Costs – when your not doing something yourself there is a risk that the person might steal, might divert assets (pay themselves too big of a salary), shirking (taking money but not giving in return), leads to a third agency cost – monitoring
SH’s don’t monitor b/c management should be doing that job and if they are adequately diversified they wouldn’t worry about it
Team production –

Align interests of managers and SH’s by stock option plan
Signal – do something to signal reliability

Week 2
Second Week


There are different ideas of what capital is.

A material wealth argument: segregated by use for the corporation

Source: nothing to do with source
Could come from retained earning, or other

Accounting: quantifiable; expressed in money

Not just material but accountants have trouble w/ intangible property


S/H equity vs. debt
Stated capital(not available for distribution to S/H) vs. surplus(is available to S/H)

Business: objective resources (inputs used in production)

Two main theories for looking at valuation:

Fundamentals or intrinsic values (firm foundation theory)

Market value (castle-in-the air)

What you can get somebody to pay for it

The fundamentals of valuation

Cash flows
Expected earnings
Not so much what have you done for me, but what will you do for me in the future

Getting too far away from fundamental you let in fear, excitement,

Dutch tulips

Price goes up dramatica


Expected return



Even though the two companies range of variation very greatly, in the long run there expected returns are about the same.
Returns are going to vary to the extent risk varies.
Risk goes up as volatility of returns goes up.

Risk has to do with volatility: i.e. relative variations in your return
Standard deviation: (probability – weighted)

More risk means you have to compensate greater


What are we valuing and why?

Value of the corporation

As a going concern or
Salable assets

Quick sale (liquidation)

Value of stocks, bonds

As a financial instrument

Market value
What if no market?

Small business

Common stock: pro-rata part of the value of the corporation (S/H ownership)