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Corporate finance-lecture 1

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12 views25 pages

Corporate finance-lecture 1

Uploaded by

hathy03022004
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We take content rights seriously. If you suspect this is your content, claim it here.
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CORPORATE

FINANCE
Lecture 1
Ph.D Chung Thúy An
Finance and Banking
[email protected]
Key Concepts and Skills

• Know various forms of business organization


• Know objectives of the businesses
• Know the definition of corporate finance
• Know the major decisions of corporate finance
• Understand the conflicts of interest that can arise between owners and
managers – The principal Agency problems
• Understand the business environment.
What is Corporate Finance?

• Hire Managers to buy raw materials


• Assign staffs to make and sell bubble tea
 Generate CASH

In the language of finance


• Make an investment in assets: inventory, machinery,
land and labor
• Cash to invest in assets must be matched by an equal
amount of cash raised by financing
 Generate CASH  Create VALUE

VALUE is reflected in the framework of the simple balance sheet model of the firm.
What is Corporate Finance?

Corporate finance addresses the following three questions:


1. In what long-lived assets should the firm invest?
 Capital Budgeting decision
2. How can the firm raise cash for required capital expenditures?
 Capital structure decision
3. How should short-term operating cash flows be managed?
 Net working capital
Capital Budgeting Decision

In what long-lived assets should the firm invest?


• Left side of the Balance sheet.
• Types and proportions of assets the firm needs tend to be set by the nature of the business
• Capital budgeting – describe the process of making and managing expenditures on long-
lived assets
Capital Structure Decision

How can the firm raise cash for required capital expenditures?
• Right side of the balance sheet
• Represents the proportions of the firm’s financing from current and long-term debt and
equity
Short-Term Asset Management

How should short-term operating


cash flows be managed?
• The upper portion of the balance sheet
• Mismatch between the timing of cash
inflows and cash outflows during
operating activities  Short-term cash
flow problems
• The amount and timing of operating cash
flows are not known with certainty
Forms of Business Organization

There are three basic legal forms of organizing firms:


1. The sole proprietorship
2. The partnership
3. The corporation

 The corporate form of business is the standard method for solving the
problems encountered in raising large amounts of cash.
The Sole Proprietorship
Forms of Business Organization

• A business owned by one person


• Some businesses require that you obtain a business license
• All the profits and the losses will be yours
The Partnership
Forms of Business Organization

• A business owed by two or more people


• Partnerships fall into two categories: GENERAL and LIMITED partnerships
The Corporation
Forms of Business Organization

• A distinct legal entity: a name and enjoy many of the legal powers of natural persons
Ex: acquire and exchange property
• Starting a corporation is more complicated than starting a proprietorship or partnership.
• Three sets of distinct interests:
• the shareholders,
• the directors,
• and the corporate officers (the top management)
• Top management usually own shares and often serve on the board of directors
 Overlap issue
A Comparison of Corporation and Partnerships
Forms of Business Organization

Corporation Partnership

Liquidity Shares can be easily exchanged Subject to substantial restrictions


Voting rights Usually each share gets one General partner is in charge; limited partners
vote may have some voting rights
Taxation Double Partners pay personal taxes on partnership
profits
Reinvestment and Broad latitude on dividend All net cash flow is distributed to partners
dividend payout payout decisions
Liability Limited liability General partners may have unlimited liability;
limited partners enjoy limited liability
Continuity Perpetual life Limited life
Objectives of the Businesses

What is the main goal of the Businesses?


Source: https://mongcai.gov.vn/vi-vn/tin/diem-mat%E2%80%9D-10-cong-ty-gay-o-nhiem-nghiem-trong-nhat-o-viet-nam/0-0-575461
Source: https://mongcai.gov.vn/vi-vn/tin/diem-mat%E2%80%9D-10-cong-ty-gay-o-nhiem-nghiem-trong-nhat-o-viet-nam/0-0-575461
Source: https://nhandan.vn/khac-phuc-viec-gay-o-nhiem-moi-truong-cong-ty-tnhh-thuong-mai-tuan-tu-duoc-phep-hoat-dong-tro-lai-post785217.html
Objectives of the Businesses (Cont.)

What is the main goal of the Businesses?


Agency Problem ​& Control of the Corporation​

Agency relationship
• Someone (Principal) hires another (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.

DISCUSS THIS RELATIONSHIP


Management Goals

• Management goals may be different from shareholder goals.


• Expensive perquisites.
• Survival.
• Independence.

• Increased growth and size are not necessarily equivalent to increased shareholder wealth.
Management Manager

• Managerial compensation.
• Incentives can be used to align management and stockholder interests.
• The incentives need to be structured carefully to make sure that they achieve their intended goal.

• Corporate control.
• The threat of a takeover may result in better management.

• Other stakeholders.
Financial Markets

• Financial markets can refer to:


• Organizations that facilitate the trade of financial products; or
• The interaction between buyers and sellers to trade financial products

• Financial markets can be both domestic and international

• There are different categories of financial markets, and some of them are capital markets,
money markets, stock markets, bond markets …
Financial Markets

• Money markets
• Targets of investment are typically government-sponsored accounts (treasury issues, known as “T-
Bills”), bank-sponsored accounts (so-called Certificates of Deposit – CDs), or short-term corporate
paper
• MM are constructed to strengthen investments on short-term borrowing and lending relationships
(E.g. a corporation might sell paper (unsecured obligation such as accounts receivable or
inventory) on the market to meet its financial needs)
Financial Markets

• Capital markets
• New securities are bought and sold in the primary market, and investors sell their securities in
the secondary markets
• Companies rely on the capital markets to raise the funds needed to purchase the equipment
required to run the business, conduct research and development, and assist in securing other items
needed for the operations of the company
THANK YOU

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