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FIN 300
Mike Inglis

FIN300  |  CHAPTER  ONE:  INTRODUCTION  TO  CORPORATE  FINANCE     CORPORATE  FINANCE  (MUST  KNOW)     What  exactly  is  finance?  Name  the  SIX   (1) Cash  Flow  vs.  Income   concepts.  [Hint:  CU-­‐TERM]   o CF:  Tells  us  what  is  my  ability  today  to  pay  my  bills       o Pricing  or  evaluating       (2) Understanding  people:  behavioural  finance       o Stock  prices  goes  up/down  based  on  company  situation     o BUT!  Investors  have  impact:       a) Following  the  crowd     What  are  the  3  main  areas  of  concern  of   b) Overconfident  or  over  reaction     corporate  finance?      Ie.  Bought  50%  and  war  broke  out  =  hate     (3) Time  value  of  money     o Investing       (4) Ex-­‐anti  vs.  (forecasting  vs  real  situation)       o Forecast:  based  on  past  data     o Ie.  Stocks   Capital  Budgeting   (5) Risk  and  return     o Usually,  higher  risk  =  higher  return       (6) Market  efficiency/No  arbitrage       o FM  should  be  efficient     o Weak      All  past  information  only     o Semi-­‐strong      All  past  +  publicly  available  info  (ie.   Capital  Structure     Announcements)        Ie.  Up  till  9:45am,  $5  stock  price;     announced  dividend  $2,  10:00  =  $7     o Strong  (Rare;  basically  not  possible!)      All  past  +  public  +  insider  info.         • Price  of  same  stock  form  same     company  must  have  same  price   Working  Capital     in  different  markets     • Ie.  Same  stock  should  be  $5  in     TSX  and  USA  NYC     • Ie.  $1.50  (TSX)  and  $1.70  (US)  will     lead  to  people  buying  and  selling     for  a  profit           (1) Capital  Budgeting:  INVESTMENT     o What  LT  investments  to  take  on?     Financial  Manager  (CFO)     o DEBT  is  the  cheaper  road  NOT  shareholder’s  equity      Interest  tax  shield  (fixed)      Ie.  Profit  -­‐>  a.  retain  or  b.  dividends      SHE  want  higher  ROR             (2) Capital  Structure:  FINANCE     o Where  to  get  LT  financing  for  it?       FIN300  |  CHAPTER  ONE:  INTRODUCTION  TO  CORPORATE  FINANCE       (3) Working  Capital  Management:  WORKING  CAPITAL     o How  to  manage  day  to  day  activities?     o Ie.  CA  and  CL,  dividend  decision        How  much  you  want  to  retain  and  give  to  SH?         • “Planning  and  managing  LT  investments”       • Value  of  cash  flow  generated  >  cost  of  asset       o Ie.  Opening  a  store  vs  cashier  system       • Consider  (SRT):       a. Size  –How  much  $$  it  makes       b. Risk  –Likeliness  of  getting  it       c. Timing  –When  we  will  actually  receive  it           • “Mix  of  STD,  LTD  and  equity  used  to  finance  operations       • Main  concerns:       a. HOW  to  borrow      Mix  affects  risk  and  value  of  firm       b. LEAST  COSTLY  way  to  fund        Consider  expenses,  lenders  and  loan  types           • “Planning  and  managing  CA  &  CL”       • WC  =  Short  Term  Liabilities  (STL)  –  Short  Term  Assets  (STA)       • Cost  management  decisions:   a. How  much  cash  and  inventory  to  keep  on  hand?       b. Sell  on  credit  (CR)  or  no?  If  so,  terms  and     customers?       c. Getting  ST  financing…    Borrow  ST  and  pay  cash  OR  buy  on  credit?             • Treasurer  –  oversees  cash  management,  capital       expenditures  and  financial  planning.     • Controller  –  oversees  taxes,  cost  accounting,  financial   accounting  and  data  processing                 What  does  the  financial  manager  do?         (1) Cash  raised  from  investors       (2) Cash  invested  in  firm     (3) Cash  generated  by  operations   (4) a.  Cash  re-­‐invested       b.  Cash  returned  to  investors                   FIN300  |  CHAPTER  ONE:  INTRODUCTION  TO  CORPORATE  FINANCE     ORGANIZING  A  BUSINESS     Sole  Proprietorship       …  Name  3  advantages?      Simple    Owner  keeps      Less  regulated   100%  of  profits         …  Name  at  least  3  disadvantages?      Hard  to  raise  financing      Life  limited  to  owner        Hard  transfer  of  ownership      Taxed  to  personal      Unlimited  liability     income     Partnerships     What  are  the  types  of  partnership?     (a) General  partnership:  all  sitting  on  the  same  boat!!       o Requires  agreement       (b) Limited  partnership:  get  to  run  for  their  lives!!       o 1+  general  partners  run  business  for  1+  limited     partners         …  Name  at  least  3  advantages?      Increase  human  and    Simple  w/little  regulations     financial  capital    Limited  partners  have      Owner  keeps  all  profits       limited  liability     …  Name  at  least  3  disadvantages?      Hard  transfer  of    Taxed  as  personal     ownerships     income        General  partners  have    Disagreements     unlimited  liability    Limited  life     Corporations     What  is  it  and  what  is  it  capable  of?     • “Legally  distinct  business  from  its  owners  (shareholders)     o ie.  Can  be  sued,  own  property,  borrow  $$       • Abilities:  general/limited  partner         What  is  needed  to  build  one?     a. Articles  of  incorporation  /charter       o Name,  life,  purpose,  #  of  shares  issued       b. By-­‐Laws  :  regulation  rules       o Can  be  changed  overtime         …  Name  at  least  3  advantages?      Raises  &  access  to  capital      Unlimited  life        Easy  transfer  of    Limited  liability       ownership      Separation  of  ownership  and  management**       …Name  at  least  3  disadvantages?      Complex      Double  taxation      Costly     *Corporate  and      Separation  of  ownership   personal  rate       and  management**    Personal  guarantees           **Owners  (SH)  and  managers  (agents)  running  business:       • (+):  Diversification  and  expertise       • (-­‐):  Interest  is  different,  COI,  information  knowledge         FIN300  |  CHAPTER  ONE:  INTRODUCTION  TO  CORPORATE  FINANCE     What  happens  in  a  large  corporation?   • Shareholders  are  SEPARATE  from  mgm’t       • Process:       o SH  vote  for  BOD  >  votes  for  managers       o Mgm’t  runs  affairs  in  SH’s  interests     Co-­‐Op     What  is  it?     • “Business  owned  equally  by  members  who  share  benefits,     based  on  usage”           What  are  the  different  types?     (a) Consumer:  provides  g/s     (b) Producer:  process  &  markets  g/s  made  by  members;     supplies  g/s  needed     (c) Worker:  providers  work       (d) Multi-­‐stakeholder:  serves  needs  of  various  stakeholders         GOAL  OF  A  FIRM     Primary  Goal  of  Financial  Management     *GOAL:  MAKE  MONEY  FOR  SHAREHOLDERS  BY  ^  STOCK  PRICE     (1) Maximize  shareholders  wealth       (2) Maximize  share  price   (3) Maximize  firm  value       What  is  the  goal  and  HOW  is  it  done?   • Ie.  Increased  profits  =  increased  profi
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