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COMM 121
Chapter 1
1.1 What is corporate finance?
1. Capital budgeting: the process of making and managing expenditures on long-lived assets
(capital expenditure) – left side of balance sheet
2. Capital structure: the proportions of the firm’s financing from current and long-term debt and
equity – right side of balance sheet
- V (value) = B (bonds) + S (shares)
3. Net working capital: (current assets – liabilities) the mismatching of cash inflows and outflows
- Financial managers: create value from firm’s capital budgeting, financing, and liquidity activities
- Timing of cash flows: one dollar received today is worth more than one dollar received next
year because today’s dollar can be invested to earn interest
1.3 The Corporate Firm
- Partnership & Sole Proprietors: advantage = cost of getting started, disadvantages = (1)
unlimited liability (2) limited life of the enterprise (3) difficulty of transferring ownership
- Corporation: difficult to start- become their own citizen of its province of incorporation
o Shareholders (the owners)
o Directors
o Corporation officers (top management)
- Income trusts: hold the debt and equity of an underlying business and distribute the income
generated to unitholders
1.4 Goals of the Corporate Firm
- Shareholders and managerial interest conflict – pricey to enforce agency costs
- Managers: survival, independence, and self-sufficiency (corporate wealth)
- Stakeholder concerns are attaining additional clout through the growth of interest in ethical or
socially responsible investing
1.5 Financial Institutions, Financial Markets, and the Corporation
- Financial institutions: intermediaries between investors and firms raising funds
- Money markets: where short-term debt securities of many varieties are bought and sold
- Capital markets: for long-term debt and shares of stock
- Primary market: the corporation is the seller and raises money through the transaction
- Secondary market: one owner or creditor selling to another (auction and dealer markets)
- Foreign exchange market: where one country’s currency is traded for another’s
1.6 Trends in Financial Markets and Management - Hedgefunds: collective term for different types of investment funds
Chapter 4
4.1 The Financial Market Economy
- Market clearing: the total amount one party wishes to lend equals the total amount that the
others would like to part
- Equilibrium rate of interest: an interest rate that clears the market ç
4.3 The Competitive Market
- Assume Perfectly competitive financial markets: trading is costless, borrowing and lending is
readily available, the single trader can have a significant impact
4.6 Illustrating the Investment Decision
- Net present value rule: an investment is worth making if it has a positive NPV
Chapter 5
5.1 The One-Period Case
- Future value (compound value): the value of a sum after investing over one or more periods.
- Present value (PV): C /(1+r) where C is ca1h flow at date 1 and r is interest rate
- Net Present Value of Investment = cost today (negative) + present value of next year’s sales
price
5.2 The Multiperiod Case
- Compounding: the process of leaving money in the capital market and lending it for another
year
- Simple interest: r is interest on interest
- Compound interest: each interest payment is reinvested
- Future Value of an Investment: FV = C x (1+r) where T is the number of period over which the
0
cash is invested
- Discounting: the process of calculating the present value of a future cash flow
- Present Value Factor: the factor used to calculate the present value of future cash flow
PV= (C/(1+r) )x
5.3 Compounding Periods
m
- C 01+r/m) where r is the stated annual interest at m times a year
- Effective annual interest rate: the annual rate of return
m
(1+r/m) – 1
- Future value with compounding: FV = C (1+r/m)0 mT for T years - Continuous compounding: to compound every infinitesimal instant
C0x e rT
5.4 Simplifications
- Perpetuity: a constant stream of cash flows without end
- Formula for present value of perpetuity: PV = C/r
- Growing perpetuity: assuming that the rise will continue indefinitely
- Formula for present value of growing perpetuity: PV = C/ (r-g) where g is growth per period
- Annuity: a level stream of regular payments that lasts for a fixed number of periods
T
- Formula for present value of annuity: PV = C [(1/r) – (1/(r(1+r) ))]
- Annuity factor: the term we use to compute the value of the stream of level payments, C, for T
years
- Mortgages: annuity with monthly payments
- Growing annuity: finite number of growing cash flows
- Formula for present value of growing annuity: PV = C [ (1/(r-g)) – (1/(r-g)) X ((1+g)/(1+r)) ] T
Chapter 6
6.1 Definition and Example
- Bond: a certificate showing that a borrower owes specified sum
6.2 How to Value Bonds
- Pure discount bond: promises a single payment at a fixed future date
- Maturity date: the date the issuer of the bond makes the last payment
- Face value: payment of bond at maturity
- Value of pure discount bond: PV = F/(1+r) T
- Coupons: cash issued at regular times before reaching maturity
- Value of a level-coupon bond: PV = C[(1/r) + (1/(r x (1+r) ))] + F/(1+r) T
T
Or PV = C X + F/(1+r)
- Clean price: quoted price net of “accrued interest”
- Dirty price: price actually paid that includes accrued interest
- Consols: bonds that never stop paying a coupon
6.3 Bond Concepts
- Trade at a face value of $1000 if he coupon rate is equal to the marketwide interest rate
- Trade at discount if the coupon rate is below the marketwide interest rate
- Trade at a premium if he coupon rate is above the market wide interest rate
- Discount: to sell the bond at lesser value
- Premium: to sell the bond at greater value
- Yield to maturity: percent return
- Holding-period return = (ending price – beginning price)/ Beginning price 6A Appendix
- Spot rates: different rates of interest over different years
- Term structure: describes the relationship of spot rates with different maturities
- Forward rate: hypothetically return the second year of a spot rate
- Forward rate:

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