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
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