Corporate Chapter 1
Corporate Chapter 1
Corporate Chapter 1
CORPORATE FINANCE
•Cash management
CORPORATE FINANCE (Cont..)
λ Dividend policy
Capital
• budgeting: the process of
planning and managing a firm’s long-
term investments ⇒ fixed assets.
Example:
• deciding whether or not to open a new
restaurant.
Capital
• structure: the mixture of debt
and equity maintained by the firm ⇒ S-T
and L- T debt and equity.
Working
• capital management: a firm’s
short- term assets and liabilities ⇒
current assets and current liabilities.
The Balance-Sheet Model of the Firm
Current
Curre
Liabiliti
nt
es
Assets
Long-
Fixed
Term
Assets Debt
1
Shareh
Tangible olders
’
2 Equity
The Capital Budgeting Decision
Current
Curre
Liabiliti
nt
es
Assets
Long-
Fixed
Term
Assets What long- Debt
term
1 investment Sharehol
s should
Tangible ders
’
the firm
choose? Equit
2 y
The Capital Structure Decision
Curre
nt
Crr ent
Liabilit
Assets How Long-
ies
can the TermDe
firm raise bt
the
Fixed
money for
Assets the
required Shareh
1 olders
investment
Tangible s? ’
Equity
The Net Working Capital Decision
Curr
Net ent
Liabilit
Crrent Worki ies
Assets ng Long-
Capit Term
al
De
bt
How much
Fixed short-term
Assets cash flow
1 does a
Tangibl company Sharehol
2 ders
’
e need to pay
Intangib Equit
le
its bills?
y
Capital Structure
Three
λ major forms in the United States
Sole Proprietorship
–
Partnership
General
–
Limited
–
Corporation
–
C-Corp
–
S-Corp
–
Limited Liability Company
Sole Proprietorship
Disadvantages
Advantages
Limited to life of owner
Easiest to start Equity capital limited
Least regulated to owner’s personal
Single owner keeps all wealth
the profits Unlimited liability
Taxed once as Difficult to sell
personal income ownership interest
Partnership
Advantages Disadvantages
Unlimited liability
Two or more owners Partnership dissolves when
More capital available one partner dies or wishes
Relatively easy to to sell
start Difficult to transfer
Income taxed once as ownership
personal income
Disadvantages
Advantages
Separation of ownership
Limited liability and management
Unlimited life Double taxation
Separation of ownership (income taxed at the
and management corporate rate and then
Transfer of ownership is dividends taxed at the
easy personal rate)
Easier to raise capital
Who make the decisions
λ Professional managers.
Financial managers
λ Survive
λ Maximize sales
λ Minimize costs
different.
3 aspects of sustainability
– Custom
– ers
– Supplier
– s
– Employees (human capital and
– assets) Creditors (bondholders,
– banks, debtholders) Government:
tax and regulations Community
(local / global) Owner/shareholder
Separation of Ownership and Control
Board of Directors
Management D S
e h
b a
Debt t r
Assets
Equity e
h h
o o
The agency problem
λ Agency relationship:
– Principals (citizens) hire an agent (the president) to represent their
interest.
–Principles
(stockholders) hire agents (managers) to
run the company.
λ Agency problem:
– Conflict of interest between principals and
– agents.
This occurs in a corporate setting whenever the
– agents do not hold 100% of the firm’s shares.
The source of agency problems is the
separation of (owners’) control and
management.
Agency costs
λ Financial Institutions
Indirect finance
Direct
Finance
Funds Financia Funds
supplie l demande
rs intermedia rs
ries
Financial markets
• Money Markets
•
– For long-term debt and equity
Financial markets
• Primary Market
the firm.
another.
–Securities
may be exchange traded or trade
over- the-counter in a dealer market.
Financial markets
Firms Stock
Invest
s and
ors
Bonds
Mon
ey Bob Su
e
Primary Market
Secondary Market
Overview of Corporate Securities
dividends.
Preferred stock
λ Cash Flows: The firm agrees to give the holder of this security a
set dividend every period (for example 52.25 per quarter per
share).
Preferred stock
λ Tax Status: Same as common stock.
λ Tax Status:
λ Types of Debt
a. Maturity
1. Funded. any debt repayable in more than One
year.
2. Unfunded. debt repayable in less than one
year.
b. Repayment provisions.
1. Sinking fund. The company contributes money
to the fund which then repurchases the bonds.
2. Call options give the firm the right to
repurchase "the debt at a specified price.
Overview of Corporate Securities
λ Types of Debt
c. Seniority
1. Senior Debt: Paid prior to all other claimants.
2. Subordinate Debt: Paid after the senior debt
holders.
3. Secured Debt: Can claim the asset used as
security if payments are not satisfied. A lease
agreement is essentially the same as secured
debt.