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    Mcgraw-Hill/Irwin Corporate Finance, 7/E

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    Damat
    The document discusses corporate finance and introduces key concepts like the balance sheet model of the firm, capital structure decisions, and goals of the corporate firm to maximize shareholder wealth. It also outlines topics that will be covered in the textbook.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd

    Mcgraw-Hill/Irwin Corporate Finance, 7/E

    Uploaded by

    Damat
    52 views16 pages
    The document discusses corporate finance and introduces key concepts like the balance sheet model of the firm, capital structure decisions, and goals of the corporate firm to maximize shareholder wealth. It also outlines topics that will be covered in the textbook.

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    The document discusses corporate finance and introduces key concepts like the balance sheet model of the firm, capital structure decisions, and goals of the corporate firm to maximize shareholder wealth. It also outlines topics that will be covered in the textbook.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    52 views16 pages

    Mcgraw-Hill/Irwin Corporate Finance, 7/E

    Uploaded by

    Damat
    The document discusses corporate finance and introduces key concepts like the balance sheet model of the firm, capital structure decisions, and goals of the corporate firm to maximize shareholder wealth. It also outlines topics that will be covered in the textbook.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 16

    McGraw-Hill/Irwin

    Corporate Finance, 7/e


    1-1

    CHAPTER
    1
    Introduction to Corporate
    Finance

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-2

    Chapter Outline
    1.1 What is Corporate Finance?
    1.2 Corporate Securities as Contingent Claims on
    Total Firm Value
    1.3 The Corporate Firm
    1.4 Goals of the Corporate Firm
    1.5 Financial Markets
    1.6 Outline of the Text
    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-3

    What is Corporate Finance?


    Corporate Finance addresses the following three
    questions:

    1. What long-term investments should the firm engage


    in?
    2. How can the firm raise the money for the required
    investments?
    3. How much short-term cash flow does a company
    need to pay its bills?
    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-4

    The Balance-Sheet Model


    of the Firm
    Total Value of Assets: Total Firm Value to Investors:
    Current
    Liabilities
    Current Assets
    Long-Term
    Debt

    Fixed Assets
    1 Tangible Shareholders’
    2 Intangible Equity

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-5

    The Balance-Sheet Model


    of the Firm
    The Capital Budgeting Decision
    Current
    Liabilities
    Current Assets

    Long-Term
    Debt

    Fixed Assets What long-


    term
    1 Tangible investments Shareholders’
    2 Intangible should the Equity
    firm engage
    in?
    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-6

    The Balance-Sheet Model


    of the Firm
    The Capital Structure Decision
    Current
    Liabilities
    Current Assets

    Long-Term
    How can the firm Debt
    raise the money
    for the required
    Fixed Assets
    investments?
    1 Tangible Shareholders’
    2 Intangible Equity

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-7

    The Balance-Sheet Model


    of the Firm
    The Net Working Capital Investment Decision
    Current
    Liabilities
    Current Assets
    Net
    Working
    Capital
    Long-Term
    Debt

    How much short-


    Fixed Assets
    term cash flow
    1 Tangible does a company
    need to pay its Shareholders’
    2 Intangible bills? Equity

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-8

    Capital Structure
    The value of the firm can be
    thought of as a pie.

    The goal of the manager is 70%50%30%


    25%
    to increase the size of the DebtDebt
    Equity
    pie.
    75%
    50%
    The Capital Structure Equity
    decision can be viewed as
    how best to slice up a the
    pie.
    If how you slice the pie affects the size of the pie,
    then the capital structure decision matters.
    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-9

    Hypothetical Organization Chart


    Board of Directors

    Chairman of the Board and


    Chief Executive Officer (CEO)

    President and Chief


    Operating Officer (COO)

    Vice President and


    Chief Financial Officer (CFO)

    Treasurer Controller

    Cash Manager Credit Manager Tax Manager Cost Accounting

    Capital Expenditures Financial Planning Financial Accounting Data Processing


    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-10

    The Financial Manager


    To create value, the financial manager should:
    1. Try to make smart investment decisions.
    2. Try to make smart financing decisions.

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-11

    The Firm and the Financial Markets


    Firm Firm issues securities (A) Financial
    markets
    Invests
    Retained
    in assets cash flows (F)
    (B)
    Short-term debt
    Current assets Cash flow Dividends and Long-term debt
    Fixed assets from firm (C) debt payments (E)
    Equity shares

    Taxes (D)
    The cash flows from
    Ultimately, the firm
    the firm must exceed
    must be a cash the cash flows from the
    generating activity. Government
    financial markets.
    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-12

    1.4 Goals of the Corporate Firm


    The traditional answer is that the managers of the
    corporation are obliged to make efforts to
    maximize shareholder wealth.

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-13

    Separation of Ownership and Control

    Board of Directors

    Debtholders

    Shareholders
    Management

    Debt
    Assets
    Equity

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-14

    1.5 Financial Markets


    Primary Market
    When a corporation issues securities, cash flows from
    investors to the firm.
    Usually an underwriter is involved
    Secondary Markets
    Involve the sale of “used” securities from one
    investor to another.
    Securities may be exchange traded or trade over-the-
    counter in a dealer market.
    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.
    1-15

    Financial Markets

    Stocks and
    Investors
    Bonds
    Firms securities
    Money Bob Sue
    money

    Primary Market
    Secondary
    Market

    McGraw-Hill/Irwin
    Corporate Finance, 7/e © 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.

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