Corporate Finance summary
Chapter 1 – introduction
A financial manager must be concerned with 3 basic types of questions.
1. Capital budgeting – about long-term investments. Seeking investment
opportunities which value is worth more to the firm than they cost to acquire.
2. Capital structure – ways in which the firm obtains and manages the long-term
financing it needs to support its long-term investment. It is the mixture of long-
term debt and equity (amount money raised by the firm that comes from the
owner’s investment) the firm uses to finance is operations.
3. Working capital management – refers to a firm’s short-term assets. Needs to
ensure that the firm has sufficient resources to continue its operations and avoid
costly interruptions.
Financial manager acts in the shareholder’s best interests by making decisions that
increase the value of the equity. The goal of financial management is to maximize the
current value per share of existing equity.
The total value of the equity in a corporation is simply equal to the value of owner’s
equity. General goal is to maximize the market value of the existing owners’ equity.
There was some critique on value maximization because it appears to ignore other
important elements. The triple bottom line is not to maximize only shareholder value,
but also measure its contribution to society and environment.
Primary markets transactions are where the corporation is the seller and the
transaction raises money for the corporation. They engage in 2 types of primary market
transactions, public offering and private placement (speaks for itself)
Secondary market transactions involve one owner or creditor selling to another. It
provides the means for transferring ownership of corporate securities.
Dealer markets are people who buy and sell for themselves. Auction market is to match
those who wish to sell with who wish to buy.
Chapter 2 – corporate governance
There are 3 different legal forms of business organisations:
Sole trader
is owned by one person, therefore least regulated. It keeps all its profits but has
unlimited liability for business debts. They can look at personal assets for payment. life is
limited to the owner’s lifespan and the amount of equity raised is limited to owners’
personal wealth.
,Partnership
two or more owners, all share gains or losses and unlimited liability for all partnership
debts. In a limited partnership, one or more general partners will run business and have
unlimited liability, there is one or more limited partners who will not actively participate
in the business. Also limited equity that can be raised.
So, the primary disadvantages of sole trader and partnerships are:
1. Unlimited liability for business debts on the part of the owner
2. Limited life of the business
3. Difficulty of transferring ownership
Corporation
It is a legal “person” separate and distinct from its owners. It can borrow money and own
property, can sue and be sued, and can enter contracts. Forming a corporation involves
preparing articles of incorporation (name, intended life, purpose, number shares issued)
and memorandum of association (rules describing how corporation regulated its
existence).
the result of the separation of ownership and management are several advantages. The
life of the corporation is not limited. The shareholder has limited liability for corporate
debs. If a corporation needs new equity, it can sell new shares and attract new investors.
Relationship between shareholders and management is called type 1 agency
relationship/problem. There is a possibility of conflict of interest between the
shareholders and management of the firm.
Agency cost refers to the cost of the conflict of interest between shareholders and
management. Direct agency costs are expenditures that benefits management but costs
the shareholders (private jet). Second type of direct costs are expense that comes from
the need to monitor management decisions. Indirect agency costs are lost opportunities.
Control of the firm rests with shareholders. They elect the board of directors, who in turn
hire and fire managers. Board of electives can be chosen by 2 ways. Cumulative voting
is the most equal, a procedure in which the shareholders may cast all votes for one
member. The directors are elected all at once. 50% plus one share will guarantee you a
seat. Straight voting is a procedure in which shareholders may cast all votes for each
member of the board. Directors are elected one at a time. If there are N directors up for
election, then 1/(N+1) percent of the shares plus one share will guarantee you a seat.
Relationship between a dominant or controlling shareholder and other shareholders who
have a small proportions ownership stake is known as type 2 agency
relationship/problem. The possibility of conflict of interest between controlling and
minority shareholders. When a investor owns a large percentage of a company’s shares,
they have the ability to remove or install a board of directors through their voting power.
, A stakeholder is someone, other than a shareholders or creditor, who potentially has a
claim on the cash flows of the firm.
Chapter 3 – financial statement analysis
The annual report presents 3 financial statements
1. Statement of financial position / balance sheet
2. Income statement
3. Statement of cash flows
The statement of financial position/Balance
sheet summarizes what the firm owns (assets),
what is owes (liabilities). The difference between
a firm’s total assets and total liabilities is the
shareholders equity.
Assets are on the left side, liabilities on the
upper right, equity on the lower right. The
difference between a firm’s current asset and
current liabilities is called net working capital.
If current assets > current liabilities, its positive.
It means the cash that will become available
over the next 12 months exceeds the cash that must be paid over the same period.
The values in the statement of financial position for the firm’s assets are book values.
The assets can be shown in 2 ways. The first is historical costs model, in which assets
are valued at what the firm paid for them. The second one is the revaluation model,
which presents an assets value as what it is worth in the market today, known as fair
value amount.
The income statement
it measures performance over some period. The income statement is:
revenues−expenses=income
The last item is net income, it
is often expressed on a per-
share basis and called
earnings per share.
An income statement will show revenue when it accrues. The general rule is to recognize
revenue when the earnings process is virtually complete, and the value of an exchange
of goods or services is known or can be reliable determined. Expenses shown on the
Chapter 1 – introduction
A financial manager must be concerned with 3 basic types of questions.
1. Capital budgeting – about long-term investments. Seeking investment
opportunities which value is worth more to the firm than they cost to acquire.
2. Capital structure – ways in which the firm obtains and manages the long-term
financing it needs to support its long-term investment. It is the mixture of long-
term debt and equity (amount money raised by the firm that comes from the
owner’s investment) the firm uses to finance is operations.
3. Working capital management – refers to a firm’s short-term assets. Needs to
ensure that the firm has sufficient resources to continue its operations and avoid
costly interruptions.
Financial manager acts in the shareholder’s best interests by making decisions that
increase the value of the equity. The goal of financial management is to maximize the
current value per share of existing equity.
The total value of the equity in a corporation is simply equal to the value of owner’s
equity. General goal is to maximize the market value of the existing owners’ equity.
There was some critique on value maximization because it appears to ignore other
important elements. The triple bottom line is not to maximize only shareholder value,
but also measure its contribution to society and environment.
Primary markets transactions are where the corporation is the seller and the
transaction raises money for the corporation. They engage in 2 types of primary market
transactions, public offering and private placement (speaks for itself)
Secondary market transactions involve one owner or creditor selling to another. It
provides the means for transferring ownership of corporate securities.
Dealer markets are people who buy and sell for themselves. Auction market is to match
those who wish to sell with who wish to buy.
Chapter 2 – corporate governance
There are 3 different legal forms of business organisations:
Sole trader
is owned by one person, therefore least regulated. It keeps all its profits but has
unlimited liability for business debts. They can look at personal assets for payment. life is
limited to the owner’s lifespan and the amount of equity raised is limited to owners’
personal wealth.
,Partnership
two or more owners, all share gains or losses and unlimited liability for all partnership
debts. In a limited partnership, one or more general partners will run business and have
unlimited liability, there is one or more limited partners who will not actively participate
in the business. Also limited equity that can be raised.
So, the primary disadvantages of sole trader and partnerships are:
1. Unlimited liability for business debts on the part of the owner
2. Limited life of the business
3. Difficulty of transferring ownership
Corporation
It is a legal “person” separate and distinct from its owners. It can borrow money and own
property, can sue and be sued, and can enter contracts. Forming a corporation involves
preparing articles of incorporation (name, intended life, purpose, number shares issued)
and memorandum of association (rules describing how corporation regulated its
existence).
the result of the separation of ownership and management are several advantages. The
life of the corporation is not limited. The shareholder has limited liability for corporate
debs. If a corporation needs new equity, it can sell new shares and attract new investors.
Relationship between shareholders and management is called type 1 agency
relationship/problem. There is a possibility of conflict of interest between the
shareholders and management of the firm.
Agency cost refers to the cost of the conflict of interest between shareholders and
management. Direct agency costs are expenditures that benefits management but costs
the shareholders (private jet). Second type of direct costs are expense that comes from
the need to monitor management decisions. Indirect agency costs are lost opportunities.
Control of the firm rests with shareholders. They elect the board of directors, who in turn
hire and fire managers. Board of electives can be chosen by 2 ways. Cumulative voting
is the most equal, a procedure in which the shareholders may cast all votes for one
member. The directors are elected all at once. 50% plus one share will guarantee you a
seat. Straight voting is a procedure in which shareholders may cast all votes for each
member of the board. Directors are elected one at a time. If there are N directors up for
election, then 1/(N+1) percent of the shares plus one share will guarantee you a seat.
Relationship between a dominant or controlling shareholder and other shareholders who
have a small proportions ownership stake is known as type 2 agency
relationship/problem. The possibility of conflict of interest between controlling and
minority shareholders. When a investor owns a large percentage of a company’s shares,
they have the ability to remove or install a board of directors through their voting power.
, A stakeholder is someone, other than a shareholders or creditor, who potentially has a
claim on the cash flows of the firm.
Chapter 3 – financial statement analysis
The annual report presents 3 financial statements
1. Statement of financial position / balance sheet
2. Income statement
3. Statement of cash flows
The statement of financial position/Balance
sheet summarizes what the firm owns (assets),
what is owes (liabilities). The difference between
a firm’s total assets and total liabilities is the
shareholders equity.
Assets are on the left side, liabilities on the
upper right, equity on the lower right. The
difference between a firm’s current asset and
current liabilities is called net working capital.
If current assets > current liabilities, its positive.
It means the cash that will become available
over the next 12 months exceeds the cash that must be paid over the same period.
The values in the statement of financial position for the firm’s assets are book values.
The assets can be shown in 2 ways. The first is historical costs model, in which assets
are valued at what the firm paid for them. The second one is the revaluation model,
which presents an assets value as what it is worth in the market today, known as fair
value amount.
The income statement
it measures performance over some period. The income statement is:
revenues−expenses=income
The last item is net income, it
is often expressed on a per-
share basis and called
earnings per share.
An income statement will show revenue when it accrues. The general rule is to recognize
revenue when the earnings process is virtually complete, and the value of an exchange
of goods or services is known or can be reliable determined. Expenses shown on the
