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Presentation on theme: "FUNDAMENTALS OF CORPORATE FINANCE Fourth Canadian Edition"— Presentation transcript:

Stephen A. Ross Randolph W. Westerfield Bradford D. Jordan Gordon S. Roberts CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson,Ltd.

2 The University of Lethbridge - Faculty of Management
Management 3040Y - Finance Terry D. Harbottle

3 Outline of the Text Part I: Overview of Corporate Finance
Part II: Financial Statements and Long-Term Financial Planning Part III: Valuation of Future Cash Flows Part IV: Capital Budgeting Part V: Risk and Return Part VI: Cost of Capital and Long-Term Financial Policy Part VII: Short-Term Financial Planning and Management Part VIII: Topics in Corporate Finance Part IX: Derivative Securities and Corporate Finance Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd.

4 Table of Contents Chapter 1 Introduction to Corporate Finance
Chapter 2 Financial Statements, Taxes, and Cash Flow Chapter 3 Working with Financial Statements Chapter 4 Long-Term Financial Planning and Corporate Growth Chapter 5 Introduction to Valuation: The Time Value of Money Chapter 6 Discounted Cash Flow Valuation Chapter 7 Interest Rates and Bond Valuation Chapter 8 Stock Valuation Chapter 9 Net Present Value and Other Investment Criteria Chapter 10 Making Capital Investment Decisions Chapter 11 Project Analysis and Evaluation Chapter 12 Some Lessons from Capital Market History Chapter 13 Return, Risk, and the Security Market Line Chapter 14 Cost of Capital You may use this space for a description of the slide. Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd.

5 Table of Contents (continued)
Chapter 15 Raising Capital Chapter 16 Financial Leverage and Capital Structure Policy Chapter 17 Dividends and Dividend Policy Chapter 18 Short-Term Finance and Planning Chapter 19 Cash and Liquidity Management Chapter 20 Credit and Inventory Management Chapter 21 International Corporate Finance Chapter 22 Leasing Chapter 23 Mergers and Acquisitions Chapter 24 Risk Management: An Introduction to Financial Engineering Chapter 25 Options and Corporate Securities You may use this space for a description of the slide. Irwin/McGraw-Hill copyright © McGraw-Hill Ryerson, Ltd.

6 Chapter 1 Introduction to Corporate Finance
Chapter Organization 1.1 Corporate Finance and the Financial Manager 1.2 Forms of Business Organization 1.3 The Goal of Financial Management 1.4 The Agency Problem and Control of the Corporation 1.5 Financial Markets, Financial Insts, & the Corporation 1.6 Trends in Financial Markets & Financial Mgmt. 1.7 Outline of the Text 1.8 Summary and Conclusions T1.1 Chapter Outline Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc. 1999

7 T1.2 The Four Basic Areas of Finance - Corporate Finance
Long-term investments Capital Budgeting Long-term financing Capital Structure Short-term financing Working Capital Management Financial Risk management Derivative securities Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd.

8 Capital Budgeting ‘The Process of planning and managing a firm’s long term investments’ evaluating the size, timing and risk of future cash flows are the key components of capital budgeting overall objective is to identify and invest in projects & assets that will generate a return greater than the firm’s cost of capital

9 Cqpital Structure ‘addresses the the question of how a firm should obtain and manage the long term financing needed to support its long term investments and’ it is the specific mixture of long term debt and equity capital the decision on how much debt vs. Equity impacts the risk level for the firm and the firm’s

10 Working Capital Management
Working capital refers to a firms short term assets and short term liabilities includes accounts receivable, inventory and accounts payable how much cash to keep on hand, inventory to carry, credit terms to offer to customers are examples of working capital management decisions

11 Financial Risk Management
The process of identifying, quantifying and decisions to manage certain types of risk: currency risks interest rate risks commodity price risk Other risks such as strategic, operating and commerical risks need to be considered by the firm as a whole - ideally looking at risk on an enterprise wide basis (holistic risk management)

12 T1.2 A Simplified Organizational Chart (Figure 1.1)
Board of Directors Chairman of the Board and Chief Executive Officer (CEO) President and Chief Operations Officer (COO) Vice President Marketing Vice President Finance (CFO) Vice President Production Treasurer Controller Cash Manager Credit Manager Cost Accounting Manager Tax Manager Capital Expenditures Financial Planning Financial Accounting Manager Data Processing Manager

13 Forms of Organization Sole Proprietorship Partnership Corporation
General Partnership / Limited Partnership Corporation Limited Liability Company

14 Corporations A corporation is a legal entity separate and distinct from its owners has many of the same rights, duties and privileges of an actual person: borrow money can own property can enter into contracts shareholders and management are usually separate in most larger corporations the sharedolders elect the board of directors the board then selects the senior managers who in theory are charged with running the affairs in the interests of the shareholders

15 Advantages/Dis-advantages of the Corporate Form
ownership (shares) can be readily transferrred life of the corporation is not limited limited liability makes this form attractive to investors all of the above make it easy to raise cash - sells new stock Dis-advantages double taxation of its profits

16 The Goal of Financial Management
What are firm decision-makers hired to do? “General Motors is not in the business of making automobiles. General Motors is in the business of making money.” Alfred P. Sloan Possible goals Maximize profits Maximize shareholder wealth/value Maximize share price Maximize firm value

17 The Agency Problem and Control of the Firm
Agency Relationships and Management Goals potential for conflict - is their too much emphasis on corporate survival, job security and (more recently) with mangement wealth creation? Do managers Act in the Shareholders’ interests? They are influenced by: how they are compensated - does their compensation encourage them to make decisions that will enhance shareholder value how easily are they replaced if they do not pursue shareholder goals - control here is with the board of directors You may use this space for a description of the slide.

18 T1.6 The Agency Problem Continued
Agency costs Agency Costs - defined as the costs associated with the conflict of interests : Direct agency costs Indirect agency costs Impact of Agency Costs on Shareholder Wealth or Value direct - expenditures benefiting Management e.g. the unneeded corporate jet or direct - monitoring costs e.g. outside auditors indirect - lost opportunity where Management is not acting in the best interests of its shareholders e.g. costly acquisitions driven more by desire for power and prestige

19 Conflict of Interest Will Managers work in the Shareholder’s best interest? Mechanisms to ensure Managers are acting in shareholders’ interest: managerial compensation active and knowledgable iboard of directors Active institutional investors Takeover activity

20 Financial Institutions, Markets and the Corporation
T1.7 Financial Markets Financial Institutions, Markets and the Corporation Financial Institutions Act as intermediaries between investors and firms raising funds - banks, trust companies, investment dealers, insurance companies, etc. direct finance indirect finance

21 T1.7 Financial Markets Continued
Financial Markets - brings buyers and sellers of debt and equity securities together How do financial markets differ? Type of securities traded/how trading is conducted and who the buyers and sellers are Money markets and capital markets money market - short term debt securities capital market - long term debt and equity

22 T1.7 Financial Markets Continued
Primary vs. secondary markets Primary Market- where the original sale of issue of a security by a government or corporation occurs public offering - underwritten by an investment dealer and registered with provincial securities commissions private placement - debt and equity sold directly to a buyer - typically life insurance companies and , pension funds

23 T1.7 Financial Markets Continued
Secondary Market - trading of securities subsequent to the initial sale - enables the transfer of ownership auction market - TSE dealer market - ‘over the counter (OTC) ‘ How do financial markets benefit society?

24 Financial Markets and Society
what is the benefit to society? Channel savings into investment produce and transmit information on returns and risk provide a media and a payments system enable the shifting of the timing of consumption over a life cycle enable the management of risk enable the diversification of portfolios

25 T Financial Markets and the Corporation - Cash Flows Between the Firm and the Financial Markets (Figure 1.2) You may use this space for a description of the slide.

26 T1.9 Chapter 1 Quick Quiz Quick Quiz 1. Who performs the financial management function in the typical corporation? 2. What are the major advantages and disadvantages of the corporate form of organization? 3. Why is shareholder wealth maximization a more appropriate goal than profit maximization? You may use this space for a description of the slide.

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