FNCE 2P91 - Section 05
Winter 2011 - Duration 03
FNCE 2P91: Corporate Finance-Notes-Introduction and Chapter 5
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
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
o What long-term investments or projects should the business take on?
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?
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 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
o Principal hires an agent to represent their interests
o Stockholders (principals) hire managers (agents) to runt he company
o Conflicts of interest can exist between the principal and the agent – think Real Estate
Agents hire to sell a house
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
o Here short term debt securities are bought and sold. E.g. Bankers Acceptance &
Treasury notes. Typically a dealers market
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
o Where the corporation is the sell and the transaction raises money for the corporation.
E.g. IPO initial public offering
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