Essentials of Corporate Finance - ZoneCours

2
-
208
-
97 : Basic Corporate Finance


Course outline



Overview of corporate finance

◦
Definition of Corporate Finance

◦
Forms of Business Organizations



◦
Objectives of Financial Management

◦
Financial Markets




HEC Montréal
–

Winter 2010


Three

key

questions

:


◦
What long
-
term investments should the firm take on?

◦
Where will we get the long
-
term financing to pay for the
investment?

◦
How will we manage the everyday financial activities of
the firm?

HEC Montréal
–

Winter 2010




Financial managers try to answer some or all
of these questions



The top financial manager within a firm is
usually the Chief Financial Officer (CFO)


◦
Treasurer
–

oversees cash management, capital
expenditures and financial planning


◦
Controller
–

oversees taxes, cost accounting, financial
accounting and data processing

HEC Montréal
–

Winter 2010


Capital budgeting

◦
What long
-
term investments or projects should the
business take on?



Capital structure

◦
How should we pay for our assets?

◦
Should we use debt or equity?



Working capital management

◦
How do we manage the day
-
to
-
day finances of the
firm?



HEC Montréal
–

Winter 2010


Three

major
forms

in Canada


◦
Sole
proprietorship


Easy

to
start

(
less

regulated
)


Single
owner

keeps

all the profits +
taxed

once as
personal

income


Unlimited

liability


Limited life and
difficult

to
sell


◦
Partnership


Two

or more
owners


More capital
available


Taxed

once as
personal

income


Unlimited

liability

(
general

partnership
)
except

for
limited

partnership


Limited life and
difficult

to
transfer

ownership


◦
Corporation


Limited
liability


Unlimited

life


Separation

of
ownership

and management (
could

be

good or
bad
)


Easier

to
raise

capital


Transfer of
ownership

is

easy


Double taxation



HEC Montréal
–

Winter 2010

HEC Montréal
–

Winter 2010





What should be the goal of a corporation?

◦
Maximize profit?

◦
Minimize costs?

◦
Maximize market share?

◦
Maximize the current value of the company’s stock?



Does this mean we should do anything and
everything to maximize owner wealth?

HEC Montréal
–

Winter 2010


Three equivalent goals of financial
management:


◦
Maximize shareholder wealth

◦
Maximize share price

◦
Maximize firm value


HEC Montréal
–

Winter 2010


Agency relationship

◦
Principal hires an agent to represent their interests

◦
Stockholders (principals) hire managers (agents) to
run the company



Agency problem

◦
Conflicts of interest can exist between the principal
and the agent



Agency costs

◦
Direct agency costs

◦
Indirect agency costs

HEC Montréal
–

Winter 2010


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



Corporate control

◦
The threat of a takeover may result in better
management



Other stakeholders (clients, suppliers, etc)

HEC Montréal
–

Winter 2010


Investors are increasingly demanding that
corporations behave responsibly


Issues include how a corporation treats the
community in which it operates, their
customers, corporate governance, their
employees, the environment and human
rights


Controversial business activities include
alcohol, gaming, genetic engineering, nuclear
power, pornography, tobacco and weapons


Social Responsibility and Ethical Investing

HEC Montréal
–

Winter 2010


Money vs. capital markets


Primary vs. secondary markets


Public vs. private company

HEC Montréal
–

Winter 2010

HEC Montréal
–

Winter 2010


Financial institutions act as intermediaries
between suppliers and users of funds



Institutions earn income on services provided:

◦
Indirect finance
–

Earn interest on the spread between
loans and deposits

◦
Direct finance
–

Service fees (i.e. bankers acceptance
and stamping fees)


HEC Montréal
–

Winter 2010


Financial Engineering


Derivative Securities


Advances in Technology


Regulation and deregulation


Corporate Governance Reform (Enron, Nortel,
etc)

HEC Montréal
–

Winter 2010