Finance 2009 년 1 학기

Chapter 1Introduction To Corporate Finance

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Chapter Outline

• What is Corporate Finance?• The Corporate Firm• The Goal of Financial Management• The Agency Problem and Control of the Corporation• Financial Markets

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What is Corporate Finance?

Corporate Finance addresses the following three questions:

1. What long-term investments should the firm choose?

2. How should the firm raise funds for the selected investments?

3. How should short-term assets be managed and financed?

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Balance Sheet of the Firm

Current Assets

Fixed Assets

1.Tangible

2.Intangible

Total Value of Assets:

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Total Firm Value to Investors:

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The Capital Budgeting Decision

What long-term investments should the firm choose?

Current Assets

Fixed Assets

1.Tangible

2.Intangible

Shareholders’ Equity

Current Liabilities

Long-Term Debt

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The Capital Structure Decision

How should the firm raise funds for the selected investments?

Current Assets

Fixed Assets

1.Tangible

2.Intangible

Shareholders’ Equity

Current Liabilities

Long-Term Debt

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Short-Term Asset Management

How should short-term assets be managed and financed?

Net Working Capital

Current Assets

Fixed Assets

1.Tangible

2.Intangible

Shareholders’ Equity

Current Liabilities

Long-Term Debt

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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.

The Capital Structure decision can be viewed as how best to slice the pie.

If how you slice the pie affects the size of the pie, then the capital structure decision matters.

50% Debt

50% Equity

25% Debt

75% Equity

70% Debt

30% Equity

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Investment

• Return & Risk• Cost of Capital• Portfolio theory• Asset Pricing model• Term structure, Duration, Option Pricing model etc.• Risk Management

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Financial Manager

• The Financial Manager’s primary goal is to increase the value of the firm by: Selecting value creating projects Making smart financing decisions

• The top financial manager within a firm is usually

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Organization

Chairman of the Board and Chief Executive Officer (CEO)

Board of Directors

President and Chief Operating Officer (COO)

Vice President and Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager

Capital Expenditures

Credit Manager

Financial Planning

Tax Manager

Financial Accounting

Cost Accounting

Data Processing

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Forms of Business Organization• Three major forms in the United States

Sole proprietorship Partnership

– General

– Limited

Corporation

• 우리나라의 회사 형태합명회사 무한연대책임을 지는 동시에 회사를 대표할 권한을 지닌 무한책임사원으로 조직된 회사 .

합자회사 무한책임사원과 유한책임사원으로 구성되는 이원적 조직의 회사 .

유한회사 유한책임사원으로 구성 . 유한책임을 진다는 측면에서 인적회사 (partnership) 회사와 구분됨 . 규모가 작고 회사가 폐쇄적이며 양도에 제한이 있어 주식회사와 구분됨 .

주식회사 사원의 출자로 설립됨 . 출자된 금액에 대해서만 책임을 지는 회사

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Corporation

• Advantages Limited liability Unlimited life Separation of ownership and

management Transfer of ownership is easy Easier to raise capital

• Disadvantages Separation of ownership and

management Double taxation (income taxed

at the corporate rate and then dividends taxed at the personal rate)

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A Comparison  Corporation Partnership

Liquidity Shares can be easily exchanged

Subject to substantial restrictions

Voting Rights Usually each share gets one vote

General Partner is in charge; limited partners may have some voting rights

Taxation Double Partners pay taxes on distributions

Reinvestment and dividend payout

Broad latitude All net cash flow is distributed to partners

Liability Limited liability General partners may have unlimited liability; limited partners enjoy limited liability

Continuity Perpetual life Limited life

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Goal Of Financial Management

• What is the correct goal?

Maximize profit? Minimize costs? Maximize market share? Maximize shareholder wealth?

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Why Value Maximization?

• Limitations of the profit maximization Accounting approach Single period Not consider uncertainty

• Objective: Maximizing Firm Value From the stockholder’s point of view

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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

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Managerial Goals

• Managerial goals may be different from shareholder goals Expensive perquisites Survival Independence

• Increased growth and size are not necessarily equivalent to increased shareholder wealth

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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 intended goal

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

• Other stakeholders

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Financial Markets

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Financial Markets

• Primary Market Issuance of a security for the first time

• Secondary Markets Buying and selling of previously issued securities Securities may be traded in either a dealer or auction market

– NYSE

– NASDAQ

– KOSPI

– KOSDAQ

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Financial Markets

FirmsInvestors

Secondary Market

money

securitiesSueBob

Stocks and Bonds

Money

Primary Market

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Web information

• Information about individual companies• International

Yahoo finance: http://finance.yahoo.comBloomberg

• Domestic