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Notes 121.docx

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COMM 121

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COMM 121 Chapter 111 What is corporate finance1 Capital budgeting the process of making and managing expenditures on longlived assets capital expenditureleft side of balance sheet 2 Capital structure the proportions of the firms financing from current and longterm debt and equityright side of balance sheetV valueB bondsS shares 3 Net working capital current assetsliabilities the mismatching of cash inflows and outflowsFinancial managers create value from firms capital budgeting financing and liquidity activitiesTiming of cash flows one dollar received today is worth more than one dollar received next year because todays dollar can be invested to earn interest 13 The Corporate FirmPartnershipSole Proprietors advantagecost of getting started disadvantages1 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 incorporationo Shareholders the ownerso Directorso Corporation officers top managementIncome trusts hold the debt and equity of an underlying business and distribute the income generated to unitholders 14 Goals of the Corporate FirmShareholders and managerial interest conflictpricey to enforce agency costs Managers survival independence and selfsufficiency corporate wealthStakeholder concerns are attaining additional clout through the growth of interest in ethical or socially responsible investing 15 Financial Institutions Financial Markets and the Corporation Financial institutions intermediaries between investors and firms raising funds Money markets where shortterm debt securities of many varieties are bought and soldCapital markets for longterm debt and shares of stock Primary market the corporation is the seller and raises money through the transactionSecondarymarket one owner or creditor selling to another auction and dealer markets Foreign exchange market where one countrys currency is traded for anothers 16 Trends in Financial Markets and Management Hedgefunds collective term for different types of investment fundsChapter 4 41 The Financial Market EconomyMarket clearing the total amount one party wishes to lend equals the total amount that the others would like to partEquilibrium rate of interest an interest rate that clears the market43 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 46 Illustrating the Investment DecisionNet present value rule an investment is worth making if it has a positive NPV Chapter 5 51 The OnePeriod CaseFuture value compound value the value of a sum after investing over one or more periods Present value PV C1r where C is cash flow at date 1 and r is interest rate11 Net Present Value of Investmentcost today negativepresent value of next years sales price 52 The Multiperiod CaseCompounding the process of leaving money in the capital market and lending it for another yearx Simple interest r is interest on interest Compound interest each interest payment is reinvested TFuture Value of an Investment FVC x 1r where T is the number of period over which the 0cash 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 flowx PV C1r53 Compounding Periodsm C1rm where r is the stated annual interest at m times a year0 Effective annual interest rate the annual rate of return m1rm 1mT Future value with compounding FVC1rm for T years 0
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