Beruflich Dokumente
Kultur Dokumente
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Big Picture of Finance
2. Topics covered by Finance:
Individual
Earn money spend for necessities save or
invest the remaining
Personal finance investment
Corporation
Find a project Find a funding resources for
the project.
Perform the project. Evaluate the
performance of the project.
Corporate finance
We will focus on investments and corporate finance.
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Big Picture of Finance
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Course outline
Topic Chapters
Introduction and Overview of Corporate Finance 1
Financial Statements and Cash Flow 2
Working with financial statements 3
Introduction to Time Value of Money 5
Discounted Cash Flow Valuation 6
Bond Valuation 7
Stock Valuation 8
History of Capital Markets 12
Risk, Return, and Security Market Line 13
Cost of Capital 15
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Chapter1: Introduction To Corporate
Finance
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Chapter 1 Outline
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Corporate Finance
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Financial Manager
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Forms of Business Organization
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Sole Proprietorship
Advantages Disadvantages
Easiest to start Limited to life of owner
Least regulated Equity capital limited to
Single owner keeps all owner’s personal wealth
the profits Unlimited liability
Taxed once as personal Difficult to sell
income ownership interest
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Partnership
Advantages Disadvantages
Two or more owners Unlimited liability
More capital available General partnership
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Corporation
Advantages Disadvantages
Limited liability Separation of ownership
Unlimited life and management
Separation of ownership Double taxation (income
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Goal Of Financial Management
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Goal Of Financial Management
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”How Coke is Kicking Pepsi’s Can,”
Fortune, October 28, 1996.
Coke focused on soft drinks while Pepsi-Co diversified
into other areas. Pepsi-Co’s goal was to double revenues
every 5 years, while Mr. Goizueta focused on return on
investment and stock price.
.
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The Agency Problem
Agency relationship
Principal hires 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
Agency costs
Direct agency costs – the purchase of something for
management that can’t be justified
Indirect agency costs – management’s tendency to
make value reducing investment decisions (e.g., M&A)
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Mechanisms To Reduce Agency
Problem
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 goal
A 1993 study performed at the Harvard Business
School indicates that the total return to shareholders
is closely related to the nature of CEO
compensation; specifically, higher returns were
achieved by CEOs whose pay package included
more option and stock components. (See The Wall
Street Journal, November 12, 1993, p. B1).
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Mechanisms To Reduce Agency
Problem
Threat of hostile takeover
The threat of a takeover may result in better
management
Movie, Pretty Woman
Why does the threat of a takeover might make
managers work towards the goals of
stockholders?
High stock price discourages takeovers.
Shareholder intervention
Threat of firing
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Financial Markets
Video : This video discusses how capital is raised in financial
markets and shows an open-outcry market at the Chicago Board
of Trade.
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Work the Web Example
The Internet provides a wealth of information
about individual companies
One excellent site is finance.yahoo.com
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Quick Quiz
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