Chapter 1, Fundamentals by Ross et. al notes by A.P. Palasvirta, Ph.D.

 Corporate Finance  Investments  International finance  Derivatives October 26, notes by A.P. Palasvirta, Ph.D.

 Time value of money  Capital Budgeting  Risk and Return  Capital Stucture October 26, notes by A.P. Palasvirta, Ph.D.

 Markets  Valuation  Portfolio Selection  Equity Valuation Model October 26, notes by A.P. Palasvirta, Ph.D.

 Exchange Rate  Exchange Markets  Parity Conditions & Exposure  Foreign (Direct & Portfolio) Investment October 26, notes by A.P. Palasvirta, Ph.D.

 Options  Option Strategies  Futures  Swaps October 26, notes by A.P. Palasvirta, Ph.D.

 What are the responsibilities of the CEO  Strategic management (create a business plan)  Tactical management (implement strategy) Capital budgeting What projects to take on How much to spend on research and development Financing Debt, equity Short-term, long-term Working capital management Current asset management Current liability management October 26, notes by A.P. Palasvirta, Ph.D.

 Information requirements  Pro forma income statement tracks expected cash flows for the length of the investment Pro forma means guesses about what these will be Positive cash flows (revenues) Negative cash flows (costs)  Weighted average cost of capital What return the firm will have to pay investors on average whether equity or bond holders Needed to discount future cash flows back to the present October 26, notes by A.P. Palasvirta, Ph.D.

 Where the firms obtains its financing  Some financing options Retain earnings Issue new equity Issue debt Bills (discount, zero-coupon) Bonds (debentures, coupon bonds) Mortgage bonds Bank financing Sale of assets Lease October 26, notes by A.P. Palasvirta, Ph.D.

 Equity versus debt financing  Risk of default Equity holders lose control of the firm GM, Ford, Citibank  Lower cost of financing Interest cost lower Tax deductibility of interest payments  Measures  debt ratio  debt to equity ratio  Times interest earned (TIE ratio) October 26, notes by A.P. Palasvirta, Ph.D.

 Current asset management  Cash  Marketable securities  Receivables  Inventories (input & output)  Current liability management  Payables  Accrual accounts Wages, salaries Interest payments Taxes Benefits (pensions, health insurance) October 26, notes by A.P. Palasvirta, Ph.D.

 sole proprietorship  complete control  unlimited liability  general partnership  all partners share in gains and losses  unlimited liability  limited partnership  liability limited to amount contributed to partnership October 26, notes by A.P. Palasvirta, Ph.D.

 articles on incorporation  set out basics of the firm, name, etc.  bylaws  rules determining how the organization is to be run  ownership based on shares owned  limited liability to the value of the shares  shares easily traded on exchanges October 26, notes by A.P. Palasvirta, Ph.D.

 long-term - increase the value of the firm  Maximize PV of net cash flows of the firm increase revenues and other income capital budgeting decisions adding new projects decrease costs substituting less expensive for more expensive factors reduce the weighted average cost of capital  ethical questions  green solutions? October 26, notes by A.P. Palasvirta, Ph.D.

 conflict between principal and agent  management hired by stockholders to maximize value  management would prefer to maximize benefits  direct agency costs  diversion of resources to managememt  cost of monitoring (auditing function)  managerial compensation  corporate control October 26, notes by A.P. Palasvirta, Ph.D.

 Managerial compensation  Optimal compensation Salary Stock options Bonuses  Who controls the firm  Stockholders?  Board of directors?  CEO? October 26, notes by A.P. Palasvirta, Ph.D.

 stockholders  management  labor  customers  suppliers  tax authorities (local, provincial, national)  Neighbors October 26, notes by A.P. Palasvirta, Ph.D.

 Short-term instruments  Commercial bills Finance general liquidity needs Issued through investment banks, traded in secondary markets  Lines of credit Finance general liquidity needs Issued through commercial banks, traded in secondary markets  Bankers acceptances Trade credit Issued through commercial banks, traded in secondary markets October 26, notes by A.P. Palasvirta, Ph.D.

 Coupon bonds  Finance general long-term financing needs  Issued through investment banks, traded in secondary markets  Mortgage bonds  Finance specific capital intensive projects  Issued through investment banks, traded in secondary markets  Preferred & common stock  Finance both general and specific needs  Issued through investment banks, traded in secondary markets October 26, notes by A.P. Palasvirta, Ph.D.

 chartered banks  lines of credit  loans  export financing  investment banks  commercial bills  bonds  preferred stock  common stock) October 26, notes by A.P. Palasvirta, Ph.D.

 insurance companies discount  mortgages  receivables  bankers acceptances  auction markets (central location)  TSE, CDNX, NYSE, etc.  over-the-counter (OTC) markets  foreign exchange markets  NASDAQ (dealers hold position in assets) October 26, notes by A.P. Palasvirta, Ph.D.

 compartmentalize risk  options truncate the return distribution  forwards & forwards eliminate the price volatility generally at a cost (bid-ask) spread  swaps October 26, notes by A.P. Palasvirta, Ph.D.