1. FUNDAMENTALS OF CORPORATE FINANCE Fourth Canadian Edition
Stephen A. Ross Randolph W. Westerfield Bradford D. Jordan Gordon S. Roberts
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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
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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
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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
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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)
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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?
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