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    IPPTChap 001

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    ufuk uyan
    Corporate Finance

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    IPPTChap 001

    Uploaded by

    ufuk uyan
    51 views16 pages
    Corporate Finance

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    IPPTChap001

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    © © All Rights Reserved

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    PPTX, PDF, TXT or read online from Scribd

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    Corporate Finance

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    51 views16 pages

    IPPTChap 001

    Uploaded by

    ufuk uyan
    Corporate Finance

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 16

    Chapter

    #1

    INTRODUCTION TO
    CORPORATE FINANCE
    Brealey, Myers, and Allen
    Principles of Corporate
    Finance
    11th Edition
    McGraw-Hill/Irwin

    Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

    1-1 CORPORATE INVESTMENT AND


    FINANCING DECISIONS
    Real Assets
    Used to produce goods and services

    Financial Assets/Securities
    Financial claims on income generated by firms

    real assets
    Capital Budgeting/Capital Expenditure

    (CAPEX)
    Decision to invest in tangible or intangible

    assets
    1-2

    1-1 CORPORATE INVESTMENT AND


    FINANCING DECISIONS
    Investment Decision
    Purchase of real assets
    Financing Decision
    Sale of financial assets

    Capital Structure
    Choice between debt and equity financing

    1-3

    1-1 CORPORATE INVESTMENT AND


    FINANCING DECISIONS
    Capital Budgeting Examples
    Tangible Assets
    i.e. Expanding stores
    Intangible Assets
    i.e. Research and development for new drug

    1-4

    TABLE 1.1 RECENT INVESTMENT/


    FINANCING DECISIONS
    Company
    Boeing
    (U.S.)

    Recent Investment Decisions

    Delivers first Dreamliner after


    investing a reported $30 billion in
    development costs.
    ExxonMobil Spends $7 billion to develop oil
    (U.S.)
    sands at Fort McMurray in Alberta.
    GlaxoSmith- Spends $4 billion on research and
    Kline (UK)
    development for new drugs.
    LVMH
    LVMH acquires the Italian Jeweler,
    (France)
    Bulgari, for $5 billion.
    Procter &
    Spends $8 billion on advertising.
    Gamble
    (U.S.)
    Tata Motors Opens a plant in India to produce
    (India)
    the world's cheapest car, the Nano.
    The facility costs $400 million.
    Union Pacific Invests $330 million in 100 new
    (U.S.)
    locomotives and 10,000 freight cars
    and chassis.
    Vale (Brazil) Opens a copper mine at Salobo in
    Brazil. The project cost nearly $2
    million.
    Walmart
    Invests 12.7 billion, primarily to
    (U.S.)
    open 458 new stores around the
    world.

    Recent Financing Decisions


    Reinvests $1.7 billion of profits.
    Spends $12 billion buying back shares.
    Pays $3.2 billion as dividends.
    Pays for the acquisition with a mixture of
    cash and shares.
    Raises 100 billion Japanese yen by an
    issue of 5-year bonds.
    Raises $400 million by the sale of new
    shares.
    Repays $1.4 billion of debt.
    Maintains credit lines with its banks that
    allow the company to borrow at any time
    up to $1.6 billion.
    Issues $5 billion of long-term bonds in
    order to repay short-term commercial
    1-5
    paper borrowings.

    1-1 CORPORATE INVESTMENT AND


    FINANCING DECISIONS
    What Is a Corporation?
    Legal entity, owned by shareholders
    Can make contracts, carry on business, borrow,
    lend, sue, and be sued
    Shareholders have limited liability and cannot
    be held personally responsible for corporations
    debts

    1-6

    FIGURE 1.1 CASH FLOW BETWEEN FINANCIAL


    MARKETS AND FIRMS OPERATIONS
    (2)

    (1)
    Financial
    manager

    Firm's
    operations

    (4a)

    Financial
    markets

    (4b)

    (3)
    (1) Cash raised from investors
    (2) Cash invested in firm

    (3) Cash generated by operations


    (4a) Cash reinvested
    (4b) Cash returned to investors
    1-7

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    Stockholders Want Three Things
    To maximize current wealth
    To transform wealth into most desirable time
    pattern of consumption
    To manage risk characteristics of chosen
    consumption plan

    1-8

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    Profit Maximization
    Not a well-defined financial objective
    Which years profits?
    Shareholders will not welcome higher short-term
    profits if long-term profits are damaged

    Company may increase future profits by

    cutting years dividend, investing freed-up


    cash in firm
    Not in shareholders best interest if company earns
    less than opportunity cost of capital

    1-9

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    Shareholders desire wealth maximization
    Managers have many constituencies,

    stakeholders
    Agency Problems represent the conflict of
    interest between management and owners

    1-10

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    The Investment Trade-off
    Hurdle Rate/Cost of Capital
    Minimum acceptable rate of return on
    investment
    Opportunity Cost of Capital
    Investing in a project eliminates other
    opportunities to use invested cash

    1-11

    FIGURE 1.2 THE INVESTMENT


    TRADE-OFF

    1-12

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    Agency Problems
    Managers, acting as agents for stockholders,
    may act in their own interests rather than
    maximizing value
    Stakeholder
    Anyone with a financial interest in the firm

    1-13

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    Agency ProblemsOwnership versus
    Management
    Difference in

    Information
    Stock prices and returns
    Issues of shares and

    other securities
    Dividends
    Financing

    Different Objectives
    Managers vs.
    stockholders
    Top mgmt vs. operating
    mgmt
    Stockholders vs. banks
    and lenders

    1-14

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    Agency costs are incurred when:
    Managers do not attempt to maximize firm
    value
    Shareholders incur costs to monitor managers
    and constrain their actions

    1-15

    1-2 THE FINANCIAL GOAL OF THE


    CORPORATION
    Tools to Ensure Management Pays

    Attention to the Value of the Firm


    Managers actions subject to the scrutiny of

    board of directors
    Shirkers are likely to find they are ousted by
    more energetic managers
    Financial incentives provided, such as stock
    options

    1-16

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