Note

Lesson 1 Introduction

Finance: ways in which a person or organization generates and use capital

Examples: Personal finance, public finance, Corporate finance

What is Corporate finance?

1. How corporations make financial decision & investment decisions
2. Investment decisions based on opportunity cost of capital
3. The aim and success of financial management is to increase value

The 6 basic corporate finance functions:

1. External financing. eg, loans from bank or other lenders, equity investment from
venture capitalists, angel investors,or public markets(IPO)
2. Capital budgeting function.
3. Financial management function
4. Corporate governance function
5. Risk-management function
6. Mergers & Acquisitions

Two ways of finance a business

1. Equity: the ownership
2. Debt: borrow money

Capital Budgeting Process

1. Identifying potential investments.(Eg. Research,patent and people for Biotech
company)
2. Analyzing the investment opportunity

Borrowing from:
Bank
Bonds (is the secured debt issued publicly.)
Private lenders i.e.,PE fund, venture capital funds

When a corporation is going to raise money, which one would be more expensive
from banks or private equity?
Private equity is more expensive. They are more bigger risk taker.
*If the company is raising a big transaction with long term, it is better to go Private
Equity.

Capital structure: (It refers to the mix of a company’s different sources of capital.
Eg. 30% equity, 20% convertibles, 50% debt in a company)
Balance Sheet: Snapshot of the firm and its activities at a single point.
Assets on the left:
fixed asset: buildings,
Tangible: machinery & equipment
Intangible: brand, patents & trademarks, intellectual property

Current assets: those that has a short lives eg. Inventory, cash&cash
equivalents,account receivable,( a year or less)
No-current assets: long-term investments and not easy to convert to cash in a eg.
Property, plant and equipment, long-term investment, cars

Current liabilities VS No-current liabilities

Current liabilities: due within one year eg. Accounts payable, taxes(usually is paid
each year), dividends, current portion of long-term debt(coupon rate)...
No-current liabilities: long-term debt due beyond a 12-month period.

Exam: there will be a list of assets and you should answer which is current asset and
no-current asset.

Current ratio = Current Assets / current liabilities (one or better is generally good.)
* A measure to a company’s financial health.

Shareholder’s Equity
Also knows as stockholder’s equity or owner’s equity. It represent the portion of a
company’s total assets after all the liabilities and obligations are settled. (Residual
portion)

Reasons for Calculating Shareholder’s Equity

1. Assess Financial health(shareholder’s equity is the key indicator of a company’s
financial health)
2. Determining ownership stake
3. Evaluating solvency
4. Leverage analysis
5. Financial reporting
6. Investor decision-making
7. Creditworthiness
8. Mergers and acquisitions
9. Internal management

Accounting
Managerial Accounting
Financial accounting

Capital Allocation
The distribution, re-distribution,investment and re-investment.

Working capital
To finance its day-to-day operational activities.
Working Capital = Current Assets - Current Liabilities

Board of directors
 Making decisions on behalf of the company and its shareholder
 Corporate governance
 Major investment or other finance decisions
 Major agreement
 Setting strategic goals

CEO:
 Understanding methods of valuation
 Understanding investment pinciple
 The principals of value creation
 Financial health of the company

CFO:
 Financial or corporation finance planing
 Analyzing company’s financial strength & weakness
 Enhancing value
 Point person on corporate finance strategy and implementation

Treasurer
Financial healthy of the company
Long term corporate strategy of the company
Determines the scope & object of cash and risk management
Oversees the financial andminstrater

Controller: Manages accounting department

Capital expenditures and financial planning
Example of capital expenditure: investment in stock, investment on factory, investment in
software, purchase land or trucks

Capital structure
Mix of debt and equity that a company uses for operation and growth.
Cost of capital: the capital structure effect a company’s cost of capital. Balance debt and equity
can minimize the cost of capital.(Borrow money for 5 years is more expensive than 1 year
because 5 year has more risk)
Financial flexibility: An optimal capital structure can provides a company with flexibility on
investment without constraints. (less debt more flexibility)
Risk management: The choice between debt or equity.
Excessive debt may cause financial risk especially when the company faces cash flow issues.
Relying too heavily on equity can dilute the shareholder’s ownership and reduce the control of
current owners.
Investor attraction: The investors looking for a company with a balanced capital structure with
both promised good return and risk management effectively.(a company too risk will loss
attractive, too conservative will not yield expected return.)
Market perception: the capital structure effect how a company is viewed by investors,
lenders,analysts.(a well balanced capital structure are often seen reliable and creditable, which
can make a good reputation and make it more easier to raise money in the future. )
Value Maximization: a right capital structure can maximize the returns on investment while
keeping financing cost low, thus enhances the company’s value.
Capital allocation: how a company deploy their capital to different areas.
 Investment in Business Operations: Reinvestment into existing operations or expansion into
new markets.
 Acquisitions: Using capital for buying other businesses.
 Capital Expenditure: Investment in new equipment or property to enhance productivity or
capacity.
 Research and Development: Funding innovation to stay competitive and generate future
revenue streams.
 Paying Down Debt: Reducing leverage to lower financial risk.
 Returning Capital to Shareholders: Dividends and share buybacks.

(question on exam, are you going to buy some assets or build some assets. Buy something
because it speed to market)

There are some factors effect the capital allocation:

 Strategic Fit: How well the investment aligns with the company’s strategic goals.
 Risk Assessment: Evaluating the risks associated with each allocation decision..
 Expected Returns: Projected financial returns vs. other uses of capital, i.e., opportunity cost
 Market Conditions: Current economic environment and its impact on funding costs and
opportunities.
 Capital Structure: Consideration of the company’s debt levels and equity base.

Retained Earning: the cumulative earning or net profit after accounting for dividends
Formula: Retained Earning = Beginning Retained Earning + Net Income - Dividends

Revenue: top line; Net Income: bottom line

Net Income:
Indicate the company’s profitability

Net Income = Total Revenue - Total expense

(revenue - gross cost - operation costing - interest cost)*tax rate

Common stock {it is also called ordinary shares, voting shares, equity shares}
Common stock represents equity ownership in a corporation, entitled to:
 Voting right(Typically, one vote per share)
 Elect members of the board of Directors

Preferred Stock
1. Lower the coupon rate on the debt
2. Delay dilution

Venture Capital(VC) founds: involves investing in start-up company, high tech with high growth
potential
Private Equity founds: involves investing in real estate, infrastructure...
Family offices: they manage the financial affairs of extremely wealthy families.

Debt
Debt ratio=Total Debt/total Asset
The advantage of Debt:
1. Preserve company ownership
2. Tax-deductible interest payment
Yield curve of us treasurary market

Earnings Per Share

Earnings per share(EPS): shows how much profit a compnay generates for each share of it’s

How is EPS used?

1. Evaluating profitability
2. Compare company
3. Determining stock valuation
4. Determining Dividend Assessment

Price to Earning Ratio(P/E): measure the relationship between a company’s stock price and its
earning per share
P/E=stock price/earning per share (EPS)