CORPORATE FINANCE OUTLINE
I. INTRODUCTION: FINANCE AND THE SEPERATION OF OWNERSHIP & MNGT
(BM&A CHAPTERS 1 AND 2; pages 1-29)
Economics: is a social science that studies the allocation of scarce resources.
Finance: a branch of economics that studies that allocation of scarce financial resources through time.
-involves risk and uncertainty
-involves expectations and expected values
Financial Managers Role: 2 decisions
-Investment decisions
-new projects
-expansion of existing projects
-Financing decisions: how to raise the cash for the investment in real assets?
-stockholders
-bondholders
-management
-employees
Separation of Ownership and Management (stockholders and managers)
-assumption: goal is to maximize shareholder value (not stakeholder value)
-know advantages and disadvantages
-advantages: liquidity for shareholders, professional/career managers
-disadvantages: principal agent problem, agency costs (shareholders incur costs to monitor managers b/c they don’t share the same objectives, and managers do not attempt to maximize shareholder value)
-agency costs also occur in financing (problems between shareholders and lenders and the firm)
-information asymmetries between parties is another disadvantage
Lawyers role is to reduce agency and transaction costs via legal and economic structuring of corporate transactions with the ultimate goal of…….
GOAL: to maxiimize shareholder wealth, but how? Through making the proper financing/investment decisions. In order to make the proper decisions you must be able to value.
RISK: For now we assume zero risk environment, this assumption is later eliminated.
Overview of Section: the chief goal of the company is presumably to maximize the profits of the shareholders. Managers may have different goals than sh
1 for discount factors and time value of money computations)
Additivity Property: the present value of multiple payments is the future is the sum of the present value of each cash flow.
Net Present Value (assuming no capital constraints)
NPV= PV – required investment
Rate of Return Rule (same as NPV rule): accept investments that offer rates of return in excess of their opportunity cost of capital.
Return = Profit/ Investment
Risk and Present Value: when evaluating the present value of an investment project, discount the cash flows by the rate of interest that you could earn on an investment project (or stocks or other financial securities) of equivalent risk.
-The greater the risk, the greater the discount rate
