I H C HOA SEN Khoa Kinh t Thng m i

KHOA KINH T THNG M I

CORPORATE FINANCE
ThS. Nguy n T ng Minh Email: minh.nguyentuong@yahoo.com.vn

References
Fundamentals of Corporate Finance, Brealey et al., McGraw Hill, 5th edition, USA, 2007. Foundation of Financial Management, Block & Hirt, McGraw Hill, 12th edition,USA, 2008. Other relevant materials.

Chapter 1: Introduction to Corporate Finance

Main Contents:
1. 2. 3. 4. 5. Investment and Financing Decision. Introduction to Corporation. Goals of a Corporation Financial Manager in large Corporation Importance of Financial Markets and Institutions. 6. Flow of savings to Corporations. 7. Functions of Financial Markets and Intermediaries. 8. Cost of Capital.

I. Investment and Financing Decision

Buy more facilities ? What kind ?

Investment decision

Open new market ? Invest in new technique ?

Financial Manager

Funds from bank loan ? from papa or mama ? from venture capitalists ? from stock market ? HOW MUCH ?

Financing decision

Role of investment decision and Financing decision:

Ensuring an invested project whose worth is more than its cost

I. Investment and Financing Decision (contd)

I. Investment and Financing Decision (contd)

What will financial manager do next after making financial decision ? raising funds for investment and operation

from Long-Term financing Investors (investing in debt or equity) Bank loans

1 year

from Short-Term financing How to invest spare cash for brief period (short term investment decision) How to raise cash for short term (short term financing decision)

I. Investment and Financing Decision (contd)

Flow of cash between investors and the firms operation

1 2

Cash raised by selling financial assets to investor Cash invested in the firms operations 3 4a 4b Cash generated in the firms operations Cash reinvested Cash returned to investor

I. Investment and Financing Decision (contd)

II. Introduction to Corporation

CORPORATION
an organized business a separate legal entity owned by stockholders

MINICASE: When Enron and Worldcom failed in 2002, two of the largest bankcrupcies ever, Peter was the shareholder of Enron. He would: 1. Reserve all his investment worth on Enron. 2. Loose all his investment worth on Enron. 3. Loose all his invesment worth on Enron as well as his other private properties. 4. All of these are possible to occur.

II. Introduction to Corporation

(contd) Other forms of Business Organization

Unlimited liability Limited liability Partnership

Sole Proprietorship Business income tax Limited Partnership Personal income tax

II. Introduction to Corporation

(contd)

III. Goals of the Corporation

Maximizing market value of shareholders investment in the firm

Ethics and management objectives

III. Goals of the Corporation (contd)

Agency Problem!!!
Menace for Corporation

Manager own interests Maximizing value of shareholder

IV. Financial Manager in large corporation

V. Importance of Financial Markets and Institutions

All Corporations face investment decisions financing decisions

FINANCIAL ENVIRONMENT Financial Markets

Financial Institutions

V. Importance of Financial Markets and Institutions (contd)

Financial Markets

Stock market where equity securities are issued and traded

Primary market

where new equity securities are sold

Secondary market where previously issued equity securities are traded

V. Importance of Financial Markets and Institutions (contd)

Financial Markets (contd)

Fixed-income market market for short-term financing Capital market market for long-term financing Money market where debt securities are issued and traded

V. Importance of Financial Markets and Institutions (contd)

Financial Institutions

Commercial Bank

advice and assist companies in raising funds advice on takeovers, A&M invest in the start-ups

Investment Bank

underwrite stock offering

advice investment or manage porfolio on FX derivatives

V. Importance of Financial Markets and Institutions (contd)

Financial Institutions (contd)

Insurance company

specializing in only providing long-term financing investing in corporate stocks and bonds

V. Importance of Financial Markets and Institutions (contd)

Financial intermediaries

an organization
raise

financing

Investor

V. Importance of Financial Markets and Institutions (contd)

Financial intermediaries (contd)

Mutual fund

An investment company

Pooling the savings of investors

Invest in a portfolio of securities

Hedge fund

A whole sale investment business Follow high-risk investment

Pension fund

Extracting from employees monthly paycheck Investing in mutual funds Finally withdrawn as retirement

VI. Flow of Savings to Corporation

Flow of savings to investment in a closely held corporation

VI. Flow of Savings to Corporation (contd)

Flow of savings to investment in a large, public corporation

VI. Flow of Savings to Corporation (contd)

Comments:
Applied for a newly established corporations.

Applied for a large, profitable, public firms

Cash retained and reinvested is cash saved and invested on behalf of the firms shareholders

VII. Functions of Financial Markets and Intermediaries

Transporting cash across time Risk transfer and diversification Liquidity The payment mechanism Information providing

VIII. Cost of Capital

Cost of Capital

Financial Manager

The cost of taking funds from financial markets Minimum acceptable rate of return on capital investment

VIII. Cost of Capital (contd)

Rate (%)

Cost of capital

15%

Investment projects rate of return

Investment projects rate of return 12%

Cost of capital

REFUSE the project

0%

ACCEPT the project

VIII. Cost of Capital (contd)

Cost of Capital for corporate reinvestment is set by the rate of return on investment opportunity in financial markets

Thank you for your attention !