Introduction to Corporate

Finance
Chapters 1 & 2

1
 Learning Objectives
1. Know the basic types of financial
management decision, and the role of
the financial manager.

2. Appreciate the goal of financial

management.

3. Understand how financial markets

work and the reason they exist.
 Overview of Lecture
1. Corporate Finance and the Financial Manager

2. The Goal of Financial Management

3. Financial Markets and the Corporation

 1. What is Corporate Finance?
1. Investment

What long term investments will you make? E.g. buildings

2. Financing

Where will you get long-term financing for your long term
projects? E.g. debt

3. Liquidity

How will you manage your everyday activities? E.g. pay suppliers
 1. The Financial Manager

Responsible for Responsible for

Responsible for
Investment Short-Term
Financing Decisions
Decisions Financial Planning

Oversee
Ensure the
Accounting and
Financial Welfare of
Audit Function in
the Firm
Firm
1. Corporate Organization Chart
 1. The Professions
Qualified accountants e.g. ICAEW, CIMA, ACCA, CIPFA
Taxation e.g. Chartered Institute of Taxation, Association of Taxation
Technicians
Treasury e.g. Association of Corporate Treasurers (ACT)
Financial Analyst e.g. CFA Institute
Chartered Institute for Securities & Investment (CISI)
o Investment operations
o Wealth management
o Compliance & risk
o Islamic finance
o Financial planning

7
1. Financial Management
Decisions

8
 1. Capital Budgeting
The process of planning and managing a firms
long-term investments.

Identify investment opportunities that are

worth more to the firm than they cost to
acquire

Financial managers must be concerned not

only with how much cash they expect to
receive, but also with when they expect to
receive it and how likely they are to receive it.
 1. Capital Structure
The mixture of long-term debt (borrowing)
and equity (owners investment) maintained
by a firm.

1. How much should the firm borrow?

2. What are the least expensive sources of
funds for the firm?

The financial manager also has to decide

exactly how and where to raise the money.
 1. Working Capital Management
The management of a firms short-term assets and
liabilities.

How much cash and inventory should we keep on hand?

Should we sell on credit? If so, what terms will we offer,
and to whom will we extend them?

How will we obtain the short-term financing?

2. The Goal of Financial Management

Maximize
Manage Share
Risk Price

Avoid
Financial
Distress

Maximize Value of Owners Equity

 2. The Goal of Financial Management
Maximize the current value of the companys equity

There is no short run vs. long run. The share price should incorporate
expectations about the future of the company and consider the trade-off
between short-run and long-run profits.
The purpose of a for-profit business should be to make money for its owners.
Maximizing the current share price increases the wealth of the owners of the
firm.
Same as maximizing owners equity for non-listed firms.
Non-profits can also follow the same principle, but their owners are the
constituencies that they were created to help.

13
3. Financial Markets and the
Corporation

14
3. Cash Flowing Through the System
 3. Cash Flowing Through the System
Cash is the lifeblood of a company.
Cash comes into the firm from the sale of debt and equity.
The money is used to purchase assets.
Those assets generate cash that is used to pay stakeholders, reinvest
in additional assets, repay debt holders, and pay dividends to
shareholders.

16
 3. Primary vs. Secondary Markets

Primary Markets Secondary Markets

Money that is
Securities are Investors trade Money that is
raised goes to
sold to investors securities with raised goes to
issuing firm
each other seller of securities

First share issue is Second Share

called an Initial Issue is called a
Public Offering seasoned offering Share Prices
 3. How Markets Work
Dealer Market Agency Market

Sell to dealer for Hire agent to sell

Trade 100 Hire for you

Dealer sells for 110 Agent sells for

Trade Trade 110

Profit to Dealer = Agent charges

Profit 10 Profit commission of 10
3. Examples of Stock Exchanges

New York
London Stock
Stock Euronext
Exchange
Exchange

Shanghai
Tokyo Stock
Stock
Exchange
Exchange
Corporate Governance
Chapter 2

See [1b corporate governance.pptx]

20