THE MATH OF VALUE
(IR = Investment Rate)
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,CLASS 1 – BAM Ch1 – INTRODUCTION
Corporate finance financial decision making
1. What investment should the corporation make? (spending)
2. How should it pay for those investments? (raising)
Goal of Financial Management to create VALUE,
That is when the Corporation can earn a higher return that shareholders can earn
for themselves.
Where outside investment opportunities set the standard for internal investments,
the opportunity cost, e.g. the cost of capital.
Five key themes:
1. Corporate Finance is all about maximizing VALUE
2. Where the opportunity cost of capital sets the standard for investment
decisions
3. A safe dollar is worth more than a risky dollar
4. Smart investment decisions create more value than smart financing
decisions
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, 5. Good governance matters (due to e.g. the principal-agent problem)
Real assets vs. Financial assets and Securities
(securities are a type of fin. assets which can be traded, incl. bonds and stocks)
Investment decision = purchase of real assets Capital Budgeting or
Expenditure (CAPEX)
Financing decision = sale of financial assets
Capital structure = choice between debt and equity financing
Financing equity:
1. Issuing shares
2. Retaining cash flows
A Corporation is a legal entity where shareholders have limited liability.
Upside: separation of Ownership vs. Control, as it gives
‘permanence’
Downside: principle-agent problems, differences in interests
Downside: Tax drawback, as corporations pay tax and shareholders are
taxed again
4 | Pagina
264680683
(IR = Investment Rate)
1 | Pagina
264680683
,2 | Pagina
264680683
,CLASS 1 – BAM Ch1 – INTRODUCTION
Corporate finance financial decision making
1. What investment should the corporation make? (spending)
2. How should it pay for those investments? (raising)
Goal of Financial Management to create VALUE,
That is when the Corporation can earn a higher return that shareholders can earn
for themselves.
Where outside investment opportunities set the standard for internal investments,
the opportunity cost, e.g. the cost of capital.
Five key themes:
1. Corporate Finance is all about maximizing VALUE
2. Where the opportunity cost of capital sets the standard for investment
decisions
3. A safe dollar is worth more than a risky dollar
4. Smart investment decisions create more value than smart financing
decisions
3 | Pagina
264680683
, 5. Good governance matters (due to e.g. the principal-agent problem)
Real assets vs. Financial assets and Securities
(securities are a type of fin. assets which can be traded, incl. bonds and stocks)
Investment decision = purchase of real assets Capital Budgeting or
Expenditure (CAPEX)
Financing decision = sale of financial assets
Capital structure = choice between debt and equity financing
Financing equity:
1. Issuing shares
2. Retaining cash flows
A Corporation is a legal entity where shareholders have limited liability.
Upside: separation of Ownership vs. Control, as it gives
‘permanence’
Downside: principle-agent problems, differences in interests
Downside: Tax drawback, as corporations pay tax and shareholders are
taxed again
4 | Pagina
264680683
