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36 Pages

Course Code
FIN 300
Cynthia Holmes

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Chapter 1Introduction to corporate finance CORPORATE FINANCE AND THE FINANCIAL MANAGERHow are we going to invest our money Where should we spend our moneyCorporate FinanceFinancial manager Managers that represent the owners interests and make decisions on their behalfo Usually associated with a top officer of the firm such as VP of finance or CFOo Financing borrowing money o CFO chief financial officerTreasurer finance guide oversees cahs management capital expenditures and financial planningController accountant oversees taxes cost accounting financial accounting and data processing Financial Management decisions 1Capital budgeting process of planning and managing a firms longterm investmento CapitalMONEY o Financial manager must try to identity investment opportunities that are worth more to the firm than they will cost to acquire o Evaluating the size timing when are we getting it and risk of future cash flows is the essence of capital budgeting 2Capital structure The specific mixture of shortterm debt longterm debt and equity the firm uses to finance its operationo TWO MAIN QUESTIONSHow much should the firm borrowWhat are the least expensive sources of funds for the firm o How is the firms cash flow to be dividedo How will the firm raise money3Working capital managemento Working capital a firms shortterm assets and its shortterm liabilitieso Ensuring that the firm has sufficient resources to continue its operations and avoid costly interruptions o Day to day financingFORMS OF BUSINESS ORGANIZATION Sole proprietorship Business owed by one personPartnership Business owed by two or more owners partners 1Page Corporation legal entity separate and distinct from its ownershas many of rightsduties of a personSue or be sued be a partner or own stockTHE GOAL OF FIANCIAL MANAGEMENT The general goal of financial management is to make money or add value for the ownerThe goal of financial managementThe goal of financial management is to maximize the current value per share of existing stock Or to maximize the market value of the owners equityTHE AGENCY PROBLEM AND CONTROL OF THE CORPORATION Agency relationships the relationship between shareholders and management Someone hiring someone else to represent his or her interests Agency problem the possibility of conflicts of interest between the shareholders and management of a firm between you and the agent Agency costs the costs of the conflict of interest between shareholders and managemento Indirect agency costs lost opportunity o Direct agency costA corporate expenditure that benefits management but costs the shareholdersAn expense that arises from the need to monitor management actions Managing managersManagerial compensation o Incentives can be used to align management and stockholder interests o The incentives need to be structured carefully to make sure that they achieve their goalBoard controls the firm o Even highranking managers can be fired by the board o Poorly managed firms can be acquiredOther stakeholders o Employees customers suppliers and government all have an interest in making sure the firm is wellmanaged SOCIAL RESPONSIBILITY AND ETHICAL INVESTING Investors are increasingly demanding that corporations behave responsiblyIssues include how a corporation treats the community in which it operates their customers corporate governance their employees the environment and human rightsControversial business activities include alcohol gaming genetic engineering nuclear power pornography tobacco and weapons 2PageFINANCIAL MARKETS AND THE CORPORATION Cash flows to and from the firm firm issues securities to raise cashfirm invests in assets firms operations generate cash flowcash is paid to government as taxes Other stakeholders may receive cashreinvested cash flows are plowed back into the firmcash is paid out to investors in the form of interest and dividendsMoney versus capital markets o Money markets financial markets where shortterm debt securities are bought and sold IOUsDealers marketdealers by and sell something for themselves at their own risk o Capital markets financial markets where longterm debt and equity securities are bought and soldPrimary versus secondary markets o Primary markets refer to the original sale of securities by governments and corporationsCorporateseller Transaction raises money for the corporationtransaction Public offering selling securities to the general publictransactionPrivate placement a negotiated sale involving a specific buyero Secondary markets are where these securities are bought and sold after the original saleProvide the means for transferring ownership of corporate securities Auction market is where buyers and sellers meet to exchange like the stock marketDealer markets called OTC over the counter in stock and longterm debt Dealer markets are where dealers arrange the transactions FINANCIAL INSTITUTIONS Act as intermediaries between investors households and individuals Providing a variety of services that promote the efficient allocation of funds for investors and a medium where individuals can save and borrow moneyTRENDS IN FINANCIAL MARKETS AND FINANCIAL MANAGEMENT Financial engineering creation of new securities or financial processes o Reduces and controls risks and minimize taxes3Page
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