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FIN 357 (6)
Lecture 1

FIN 357 Lecture 1: chapter 1

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University of Texas at Austin
FIN 357
Dave A.Laude

1. Introduction to Corporate Finance a. What is Corporate Finance? a.i. The purpose of a firm is to create value for the owner a.ii. Balance sheet model of the firm: a.ii.1. Assets (left side) a.ii.1.a. Current: assets with short lives (i.e. inventory) a.ii.1.b. Fixed: assets that last a long time a.ii.2. Forms of financing a.ii.2.a. Debt (loan agreements) a.ii.2.b. Equity shares (stock certificates) a.ii.2.c. Liabilities—short term and long term a.ii.3. Capital budgeting: the process of making and managing expenditures on long-lived assets a.ii.4. Capital structure: the proportions of the firm’s finance from current liabilities, long-term debts and equity a.ii.5. Net working capital: short-term management of cash flow (current assets minus current liabilities) a.iii. The Financial Manager a.iii.1. Finance activity usually associated with a top offer of the firm (VP or CFO) a.iii.1.a. Treasurer: responsible for handling cash flows, managing capital expenditure decisions, and making financial plans a.iii.1.b. Controller: handles the accounting function (taxes, cost and financial accounting and info systems) b. The Importance of Cash Flows b.i. Cash flows paid to bondholders and stockholders of the firm should be greater than the cash flows put into the firm by bondholders/stockholders b.ii. b.iii. Sometimes it is difficult to observe cash flow because most of the information we get is from accounting statements b.iv. The value of an investment depends on the timing of cash flows (one dollar today is worth more than a dollar the next year) b.v. A firm must always consider risk because the amount and timing of cash flow is not always a guarantee c. The Goal of Financial Management c.i. GOAL = MAKE MONEY or add value for the owner c.ii. Possible goals: survive, avoid bankruptcy, beat out competition, maximize profit, maintain steady earnings growth  vague? c.ii.1. However, the two main goals are: maximize profits and stability/bankruptcy avoidance c.iii. Goal of the financial manager: maximize the current value per share of the existing stock c.iii.1. If stockholders are winning (residual portion is growing), it must
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