Essentials of Corporate Finance - ZoneCours

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Dec 14, 2012 (4 years and 11 months ago)

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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