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FNCE 2P91 (13)


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Brock University
Clarke Melville

FNCE 2P91 - Section 05 Winter 2011 - Duration 03 11.01.11 FNCE 2P91: Corporate Finance-Notes-Introduction and Chapter 5 Notes  Chapter six is the hardest since it is a large chapter with a lot to learn  Class two and three are very important  Introduction sides are posted on Sakai CHAPTER ONE: INTRODUCTION TO CORPORATE FINANCE CORPORATE FINANCE  Three questions that are answered using finance: o What long-term investments should the firm take on? o Where will we get the long-term financing to pay for the investment? o How will we manage the everyday financial activities f the firm?  How Chapter One will be tested is most likely through multiple choice in the exam  Emphasize that “business finance” is just another name for the “corporate finance” mentioned under the four basic types…(can’t see the rest of the notes section of the PowerPont) 1.5 THE 3 FINANCIAL MANAGEMENT DECISIONS  Capital budgeting o What long-term investments or projects should the business take on?  Capital structure o How should we pay for out assets? o Should we use debt or equity?  Working capital management o How do we manage the say-to-day finances of the firm? o Fo…. 1. Capital Budgeting Questions  What investments should we accept?  What investments have the best return? o Investments as in new projects, buying new equipment or advertising campaigns  How long will this investment take to payback?  How risky is this investment versus other options?  What revenues (cash) will this generate. When will we receive this cash… 2. Capital Structure Questions  Where are we going to get the money for this investment?  Different mix of D&E for a car, a mortgage, a degree  What will these funds cost us? o Parents o Bank o Money Mart o Loan shark 3. Working Capital Questions  Where are we going to get the money to make payroll?  How will we pay our bills?  How will we collect our invoices?  How much inventory should we keep on hand?  How much cash should we keep on hand?  What is our credit policy for customers?  In real like this is … FNCE 2P91 - Section 05 Winter 2011 - Duration 03 1.6 FORMS OF BUSINESS ORGANIZATION  Three major forms in Canada 1.11 GOAL OF FINANCIAL MANAGEMENT  What should be the goal of a corporation? o Maximize profit? Too vague…this year? o Minimize costs? At what expense to growth? o Maximize market share? At what cost? o Maximize the current value of the company’s stock?  Does this mean that we should do anything and everything to maximize owner wealth? 1.12 PRIMARY GOAL OF FINANCIAL MANAGEMENT  Three equivalent goals of financial management o Maximize shareholder wealth o Maximize share price o Maximize firm value  … 1.13 THE AGENCY PROBLEM  Agency relationship o Principal hires an agent to represent their interests o Stockholders (principals) hire managers (agents) to runt he company  Agency problem o Conflicts of interest can exist between the principal and the agent – think Real Estate Agents hire to sell a house  Agency costs o Direct agency costs (e.g. audit) o Indirect agency costs (e.g. risk aversion) 1.16 WHAT IS THE ROLE OF FINANCIAL MARKETS IN CORPORATE FINANCE? Money vs. Capital Markets  Money Markets o Here short term debt securities are bought and sold. E.g. Bankers Acceptance & Treasury notes. Typically a dealers market  Capital Markets o Where long term debt securities are bought and sold. E.g. equity on TSX o Typically a brokers market. Agents to match sellers and buyers Primary Markets vs. Secondary Markets  Primary Markets o Where the corporation is the sell and the transaction raises money for the corporation. E.g. IPO  initial public offering  Secondary Markets o Transfer ownership What is the Role of Financial Markets in Corporate Finance?  How so financial markets benefit society? o Bring together buyers and sellers o Just like eBay o Provide transparency of prices  Lots of information  Efficient markets have many buyers and many sellers  News is quickly absorbed in
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