CORPORATE FINANCE

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Agenda

Corporate Finance and the Financial Manager The Goal of Financial Management The Agency Problem and Control of the Corporation Financial Markets and the Corporation Financial Planning & Growth Internal Growth & Sustainable Growth External Financing and Growth

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Corporate Finance
Some important questions that are answered using finance
What long-term investments should the firm take on? Where will we get the long-term financing to pay for the investment? How will we manage the everyday financial activities of the firm?

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Financial Management Decisions

Capital budgeting
What long-term investments or projects should the business take on?

Capital structure
How should we pay for our assets? Should we use debt or equity?

Working capital management

How do we manage the day-to-day finances of the firm? (Creditors, Inventory etc.)
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Goal Of Financial Management

What should be the goal of a corporation?
Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the companys stock?

Does this mean we should do anything and everything to maximize owner wealth?
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The Agency Problem

Agency relationship
Principal hires an agent to represent his/her interest Stockholders (principals) hire managers (agents) to run the company

Agency problem
Conflict of interest between principal and agent

Management goals and agency costs

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The Agency Problem

Solutions
Performance-based incentive plans Direct intervention by shareholders The threat of firing The threat of takeover

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Managing Managers
Managerial compensation
Incentives can be used to align management and stockholder interests The incentives need to be structured carefully to make sure that they achieve their goal

Corporate control
The threat of a takeover may result in better management

Other stakeholders
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The Internal Growth Rate

The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing.
ROA = 1200 / 9500 = .1263 B = .5
InternalGrowth Rate ROA b 1 - ROA b .1263 .5 .0674 1 .1263 .5 6.74%
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The Sustainable Growth Rate

The sustainable growth rate tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio.
ROE = 1200 / 4100 = .2927 b = .5 Sustainable Growth Rate
ROE b 1 - ROE b .2927 .5 .1714 1 .2927 .5 17.14%
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Determinants of Growth
Profit margin operating efficiency Total asset turnover asset use efficiency Financial leverage choice of optimal debt ratio Dividend policy choice of how much to pay to shareholders versus reinvesting in the firm
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Financial Markets
Primary vs. secondary markets
Dealer vs. auction markets Listed vs. over-the-counter securities
NYSE NASDAQ

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