Professional Documents
Culture Documents
Corporate Finance
1-1
Current Assets
Long-Term
Debt
Fixed Assets
1 Tangible
Shareholders
Equity
2 Intangible
Professor Ho-Mou Wu
Corporate Finance
1-2
Current
Liabilities
Long-Term
Debt
Fixed Assets
1 Tangible
2 Intangible
Professor Ho-Mou Wu
What longterm
investments
should the
firm engage
in?
Corporate Finance
Shareholders
Equity
1-3
Corporate Finance
Current
Liabilities
Long-Term
Debt
Shareholders
Equity
1-4
Fixed Assets
1 Tangible
2 Intangible
Professor Ho-Mou Wu
Net
Working
Capital
Current
Liabilities
Long-Term
Debt
Shareholders
Equity
1-5
Capital Structure
The value of the firm can
be thought of as a pie.
The goal of the manager is
to increase the size of the
pie.
70%50%30%
25%
DebtDebt
Equity
Corporate Finance
1-6
Invests
in assets
(B)
Retained
cash flows (F)
Short-term debt
Cash flow
from firm (C)
Dividends and
debt payments (E)
Taxes (D)
Current assets
Fixed assets
Financial
markets
Government
Corporate Finance
Long-term debt
Equity shares
Financial Markets
Primary Market
When a corporation issues securities, cash flows from
investors to the firm.
Usually an underwriter is involved
Secondary Markets
Involve the sale of used securities from one investor
to another.
Securities may be exchange traded or trade over-thecounter in a dealer market.
Professor Ho-Mou Wu
Corporate Finance
1-8
Financial Markets
Firms
Stocks and
Bonds
Money
Investors
Bob
securities
Sue
money
Primary Market
Secondary
Market
Professor Ho-Mou Wu
Corporate Finance
1-9
Investment Environment
Short term
CDs
Consumers
(Savers)
Firms
(Spenders)
Financial Markets
Stocks & $
Bonds
exchange
ownership
Financial Markets
Financial Institutions
Financial Instruments
Primary
market
real investment
Stocks &
Bonds
Professor Ho-Mou Wu
Secondary
market
Corporate Finance
1-10
10%
$110
Professor Ho-Mou Wu
Corporate Finance
1-11
$100
$140
40%
$130
30%
$100
0%
$90
-10%
$80
-20%
Corporate Finance
1-12
Professor Ho-Mou Wu
Corporate Finance
1-13
$F
Value of the firm (X)
Payoff to
shareholders
If the value of the
firm is less than $F,
share holders get
nothing.
$F
Value of the firm (X)
Professor Ho-Mou Wu
Min[$F,$X] = $F.
The sum of these is = $X
Corporate Finance
1-15
Corporate Governance
Separation of Ownership and Control
Board of Directors
Professor Ho-Mou Wu
Shareholders
Assets
Debt
Debtholders
Management
Equity
Corporate Finance
1-16
Professor Ho-Mou Wu
Corporate Finance
1-17