cfs ch01
DESCRIPTION
Corporate Financial StrategiesTRANSCRIPT
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Learning Objectives
Define the field of finance and its areas.Describe major types of corporate financial
management decisions.Compare three major types of business
organizations.Compare and contrast three models of the
firm.Understand the objective of the firm.
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Chapter Outline
1.1 What Is Finance?1.2 Ownership, Control, and Risk1.3 Three Different Views of the Firm1.4 The Role of the Corporation1.5 The Evolution of Finance1.6 A Few Words of Advice
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What is Finance?
Determining value.
Value = What something is worth now.
Making the best decision when that decision involves money.
Finance is concerned with:
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How do we use corporate resources efficiently to further the goals of the firm?
Decisions are based on The Principles of Finance
Corporate Financial Management
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The Science of Finance
Finance is a science.Like other sciences, it has fundamental
concepts, principles, and theories.In Chapter 2, we describe the Principles of
Finance.
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The Art of Finance
In some situations, precise models cannot be created.
That does not mean that we cannot make decisions in these situations.
People may refer to using intuition to make decisions.
Decision makers are often using intuition from the Principles of Finance.
They are using scientific valuation concepts, but not exact numbers.
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Three Types of Decisions
Investment Decisions What assets should the firm invest in?
Financing Decision How should the purchase of assets be financed?
Managerial Decisions How large should the firm be? How fast should it grow? Should the firm grant credit to a customer? How should the managers be compensated?
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Financial Markets and Intermediaries
The study of markets where financial securities (such as stocks and bonds) are bought and sold.
The study of financial institutions (such as commercial banks, investment banking firms, and insurance companies) that help the flow of money from savers to demanders of money.
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Investments
The study of financial transactions from the investors outside the firm.
Examples include: How do we place a dollar value on a share of
stock or a bond issued by the corporation? How do we assess the risk of these financial
securities? How do we manage a ‘portfolio’ of financial
securities to achieve a stated objective of the investor?
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The Corporate Form of Organization
Ownership The shareholders (also known as stockholders or
equityholders) are the owners of the corporation. Control
Ultimate control rests with the shareholders, but the managers control the day-to-day operations.
Risk Bearing While all parties associated with the corporation
bear the risk, shareholders bear all residual risk.
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Advantages of Corporate Form of Organization
Limited LiabilityPermanencyTransferability of OwnershipBetter Access to Capital Markets
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Rights of Ownership
Dividend RightsVoting Rights
Majority voting one vote per share per director cannot combine votes
Cumulative voting directors are voted on jointly can cast all votes for a single candidate
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Rights of Ownership (continued)
Liquidation Rights Owners have the right to a proportional share
of the firm’s residual value in the event of liquidation, after other senior claims are paid.
Preemptive Rights Owners have the right to subscribe
proportionally to any new shares issued by the firm.
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The Goal of the Firm
Between defined than profitsConsiders timing of profitsConsiders risk differences among
alternative courses of action
“Maximize Shareholder Wealth”
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Henry Ford’s Fictionalized Firm
Organized as a sole proprietorship. Henry Ford is the sole owner of the firm. He has full control over the firm. He bears all of the risk.
Cash $CRaw Material $RTools $TGarage $G Total Assets $TA
Henry’s Equity $HE Liabilities & Owner’s Equity $TA
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Henry Ford’s Fictionalized Firm
Henry’s firm after the bank loan. Henry Ford is the sole owner of the firm. He has full control over the firm. Some risk is borne by the bank. He bears all of the remaining (residual) risk.
Cash $C’Raw Material $R’Tools $T’Garage $G’ Total Assets $TA’
Bank Loan $B’Henry’s Equity $HE’ Liabilities & Owner’s Equity $TA’
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Henry Ford’s Fictionalized Firm
Henry’s firm after going public. Henry shares ownership with new (outside) shareholders. Henry’s actions constrained by bank and other
shareholders. Bank continues to bear some risk. All shareholders bear residual risk.
Cash $C”Raw Material $R”Tools $T”Garage $G” Total Assets $TA
Bank Loan $B”New Shareholder’s Equity $O”Henry’s Equity $HE Liabilities & Owner’s Equity $TA
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The Investment Vehicle Model of the FirmInvestors provide financing to the firm in
exchange for financial securities.Firm invests these funds in assets.Income generated by the firm is distributed
to the investors.Managers act in the best interest of the
shareholders, and take actions to maximize shareholder wealth.
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The Firm as an Investment Vehicle
Investments
The Firm
Investment Decisions
Financing Decisions
Corporate Financial Management
Financial Markets and Intermediaries
Three Main Areas of Finance:
TheWorld
Exchange of Money and Real Assets
Investors
FinancialIntermediaries
FinancialMarkets
Exchange of Money and
Financial Assets
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The Accounting Model of the Firm
Balance sheet view of the firm.Investment decisions are represented on the
asset (i.e. left hand) side of the balance sheet.Financing decisions are represented on the
liabilities and equity (i.e. right hand) side of the balance sheet.
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The Accounting Model of the Firm: A Balance Sheet
The Financing Decision
Current LiabilitiesAccounts PayableCurrent Debt
Long-Term LiabilitiesLong-Term Bank DebtBonds
Shareholder’s EquityCommon StockRetained Earnings
The Investment Decision
Current AssetsCashMarketable SecuritiesAccounts ReceivableInventory
Total Fixed AssetsTangible Fixed AssetsIntangible Fixed Assets
Net Working Capital =CA - CL
Total Assets = Liabs. + O.E.
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Set of Contracts Model of the Firm
The firm has contracts with a large number of stakeholders.
These contracts may be explicit or implicit.Contracts may also be contingent on
particular future outcomes.The model recognizes that conflicts of
interest may exist between the various stakeholders.
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Set of Contracts Model of the Firm
PreferredStockholders
Managers
The FirmCommonStockholders
Communities
Creditors
Governments
Customers
Suppliers
Society
Banks
Environment
Bondholders
Employees
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The Evolution of Finance
Globalization Every firm operates in a global marketplace. Financial markets transcend national boundaries.
Technology Information can be readily obtained / disseminated. Need to use computing technology to maintain a
competitive edge. Corporate Reorganization and Restructuring
Your first job will not be the job you retire from.