Chapter

1
Introduction to
Corporate Finance

Copyright © 2016 McGraw-Hill Education. All rights reserved.

Chapter Overview

• What is Corporate Finance?

• The Goal of Financial Management
• Financial Markets
• Corporate Finance in Action: Google
What is Corporate
Finance?
Why start a firm, and what are
they for?
 What is Corporate Finance?

Three Pillars of Corporate Finance

Corporate Finance

Investment Financing Liquidity

 What is Corporate Finance?

Investment - What do you need to start a firm?

Investment

Inventory Machinery Land Labour

 What is Corporate Finance?

Cash invested in assets must be matched by an

equal amount of cash raised by financing.
Investment Financing

Cash Cash
 What is Corporate Finance?

Why are you starting a firm?

Financing
Value Creation

Investment

Liquidity
 What is Corporate Finance?

Why are you starting a firm?

Corporate Finance

Investment Financing Liquidity

Value Creation
 What is Corporate Finance?

Showing Value – The Balance Sheet

Equity

Assets
Liabilities
 What is Corporate Finance?

Who Makes the Decisions?

The
Financial
Manager
 What is Corporate Finance?
Responsibilities of a Financial Manager
Buy assets that earn Choose long-term
more cash than they Investments that
cost increase firm value
Maximise
Value from
Cash
Raise cheap external Ensure efficient tax
financing policy
 What is Corporate Finance?
Cash is the centre of all financial decisions
 What is Corporate Finance?
Cash Flow Considerations
Identification

Cash Flows or Accounting Figures?

Timing

When do Cash Flows Occur?

Risk

Are Cash Flows Risky or Certain?

The Goal of Financial
Management
What do we want to achieve?
 The Goal of Financial Management
Different Goals in Practice

Maximise Avoid
Profits Distress

Be the
Survive
Best

Maximise Earnings
Sales Growth
 The Goal of Financial Management
One overriding aim

Maximise
Firm Value
The Financial Markets
Where do companies get
financing?
 The Financial Markets
Different sources of financing

Private Bank
Equity
Investors Loans

Short-term
Bonds
Financing
 The Financial Markets
Two common market structures
Intermediary Intermediary
is the Dealer is the Agent

Dealer has Trader has

Inventory Inventory
Risk Risk

Intermediary
Intermediary
earns
earns spread
commission
Corporate Finance in
Action
Google Case Study
 Corporate Finance in Action
Google’s Early Days…

Business Formation Raise Initial

Idea/Plan of Company Financing

Ch 1, 3, 4, 6, Ch 2, 15, 16 Ch 14, 19, 20,

7, 8, 17 21, 24
 Corporate Finance in Action
Google as a Multinational Business

Running the Global Public

Google IPO
Business Company

Ch 17, 22, 23, Ch 5, 9, 10, Ch 13, 18, 28,

25, 26, 27 11, 12 29, 30
Concept Quiz
Do you understand the concepts?
 Concept Quiz
How much do you understand?
During a conversation with your manager at work, he tells you that
Quiz the equity decision is a core element of corporate finance and is one
of the most important decisions any firm will have to make. Are they
right? Explain. What are the core elements of corporate finance?

Explain the assumption behind the statement: ‘The goal of financial

management is to maximize the current share price.’ Why isn’t the
goal to maximize the future share price?

Why do financial markets exist? Explain, in detail, how they facilitate

the flow of capital around the economy.