the$objective$in$corporate$...
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THE OBJECTIVE IN CORPORATE FINANCE If you don’t know where you are going, it does not maCer how you get there!
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The Investment DecisionInvest in assets that earn a return
greater than the minimum acceptable hurdle rate
The Financing DecisionFind the right kind of debt for your firm and the right mix of debt and
equity to fund your operations
The Dividend DecisionIf you cannot find investments that make your minimum acceptable rate, return the
cash to owners of your business
Hurdle Rate4. Define & Measure Risk5. The Risk free Rate6. Equity Risk Premiums7. Country Risk Premiums8. Regression Betas9. Beta Fundamentals10. Bottom-up Betas11. The "Right" Beta12. Debt: Measure & Cost13. Financing Weights
Investment Return14. Earnings and Cash flows15. Time Weighting Cash flows16. Loose Ends
Financing Mix17. The Trade off18. Cost of Capital Approach19. Cost of Capital: Follow up20. Cost of Capital: Wrap up21. Alternative Approaches22. Moving to the optimal
Financing Type23. The Right Financing
Dividend Policy24. Trends & Measures25. The trade off26. Assessment27. Action & Follow up28. The End Game
Valuation29. First steps30. Cash flows31. Growth32. Terminal Value33. To value per share34. The value of control35. Relative Valuation
Set Up and Objective1: What is corporate finance2: The Objective: Utopia and Let Down3: The Objective: Reality and Reaction
36. Closing Thoughts
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First Principles
The Investment DecisionInvest in assets that earn a
return greater than the minimum acceptable hurdle
rate
The Financing DecisionFind the right kind of debt for your firm and the right mix of debt and equity to
fund your operations
The Dividend DecisionIf you cannot find investments
that make your minimum acceptable rate, return the cash
to owners of your business
The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used
to fund it.
The return should reflect the magnitude and the timing of the
cashflows as welll as all side effects.
The optimal mix of debt and equity
maximizes firm value
The right kind of debt
matches the tenor of your
assets
How much cash you can
return depends upon
current & potential
investment opportunities
How you choose to return cash to the owners will
depend on whether they
prefer dividends or buybacks
Maximize the value of the business (firm)
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The ObjecJve in Decision Making
¨ In tradiJonal corporate finance, the objecJve in decision making is to maximize the value of the firm.
¨ A narrower objecJve is to maximize stockholder wealth. When the stock is traded and markets are viewed to be efficient, the objecJve is to maximize the stock price.
Assets Liabilities
Assets in Place Debt
Equity
Fixed Claim on cash flowsLittle or No role in managementFixed MaturityTax Deductible
Residual Claim on cash flowsSignificant Role in managementPerpetual Lives
Growth Assets
Existing InvestmentsGenerate cashflows todayIncludes long lived (fixed) and
short-lived(working capital) assets
Expected Value that will be created by future investments
Maximize firm value
Maximize equity value
Maximize market estimate of equity value
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The Classical ObjecJve
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What can go wrong?
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Who’s on Board? The Disney Experience -‐ 1997
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So, what next? When the cat is idle, the mice will play ....
¨ When managers do not fear stockholders, they will oZen put their interests over stockholder interests ¤ Greenmail: The (managers of ) target of a hosJle takeover buy out the
potenJal acquirer's exisJng stake, at a price much greater than the price paid by the raider, in return for the signing of a 'standsJll' agreement.
¤ Golden Parachutes: Provisions in employment contracts, that allows for the payment of a lump-‐sum or cash flows over a period, if managers covered by these contracts lose their jobs in a takeover.
¤ Poison Pills: A security, the rights or cashflows on which are triggered by an outside event, generally a hosJle takeover, is called a poison pill.
¤ Shark Repellents: AnJ-‐takeover amendments are also aimed at dissuading hosJle takeovers, but differ on one very important count. They require the assent of stockholders to be insJtuted.
¤ Overpaying on takeovers: AcquisiJons oZen are driven by management interests rather than stockholder interests.
No stockholder approval needed…
.. Stockholder Approval needed
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6ApplicaJon Test: Who owns/runs your firm?
¨ Look at: Bloomberg printout HDS for your firm ¨ Who are the top stockholders in your firm? ¨ What are the potenJal conflicts of interests that you see emerging from
this stockholding structure?
Control of the firm
Outside stockholders- Size of holding- Active or Passive?- Short or Long term?
Inside stockholders% of stock heldVoting and non-voting sharesControl structure
Managers- Length of tenure- Links to insiders
Government
Employees Lenders
B HDS Page PB Page 3-‐12
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Case 1: Splintering of Stockholders Disney’s top stockholders in 2003
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Case 2: VoJng versus Non-‐voJng Shares & Golden Shares: Vale
Vale Equity
Common (voting) shares3,172 million
Preferred (non-voting)1,933 million
Golden (veto) shares owned
by Brazilian govt
Valespar(54%(Non/Brazilian(
(ADR&Bovespa)(29%(
Brazilian(Ins=tu=onal(6%(
Brazilian(retail(5%( Brazilian(
Govt.(6%(
Valespar(1%(
Non.Brazilian((ADR&Bovespa)(
59%(
Brazilian(Ins<tu<onal(18%(
Brazilian(retail(18%(
Brazilian(Govt.(4%(
Litel&Participaço 49.00%Eletron&S.A. 0.03%Bradespar&S.A. 21.21%Mitsui&&&Co. 18.24%BNDESPAR 11.51%
Valespar(ownership
Vale has eleven members on its board of directors, ten of whom were nominated by Valepar and the board was chaired by Don Conrado, the CEO of Valepar.
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Case 3: Cross and Pyramid Holdings Tata Motor’s top stockholders in 2013
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Case 4: Legal rights and Corporate Structures: Baidu
¨ The Board: The company has six directors, one of whom is Robin Li, who is the founder/CEO of Baidu. Mr. Li also owns a majority stake of Class B shares, which have ten Jmes the voJng rights of Class A shares, granJng him effecJve control of the company.
¨ The structure: Baidu is a Chinese company, but it is incorporated in the Cayman Islands, its primary stock lisJng is on the NASDAQ and the listed company is structured as a shell company, to get around Chinese government restricJons of foreign investors holding shares in Chinese corporaJons.
¨ The legal system: Baidu’s operaJng counterpart in China is structured as a Variable Interest EnJty (VIE), and it is unclear how much legal power the shareholders in the shell company have to enforce changes at the VIE.
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Things change.. Disney’s top stockholders in 2009
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Read Chapter 2
Task Assess
corporate governance at your company