Lecture note 1 Corporate Finance FMT HANU, Lecture notes of Corporate Finance

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Corporate Finance

LECTURE 1: INTRODUCTION TO CORPORATE

FINANCE

Teaching Details Lecturers and tutors Mr. Nguyễn Anh Tuấn Email: tuanna@hanu.edu.vn Ms. Nguyễn Thị Thanh Loan Email: loanntt@hanu.edu.vn Ms. Nguyễn Thị Vân Anh Email: ntva1279@gmail.com

Unit Assessment

Unit Assessment is as follows:

◦ Class Participant 10%

◦ Internal assessment (2 Progression tests) 40%

◦ Final examination (50% hurdle) 50%

Assessment components

◦ Progression test: 30-40 minutes duration

◦ Final examination: 2-hour exam ( Sample Exam will

be provided)

How to Succeed in this Subject?

Regularly attend lectures and tutorials

Be prepared before lectures and tutorials

◦ Read the relevant chapters of the textbook before a

lecture

◦ Complete assigned tutorial exercises independently

at the first time

Resolve study difficulties and problems as soon as

possible.

Outline

1. What is Corporate Finance?
2. The Goal of Financial Management
3. The Corporate Firm
4. The Importance of Cash Flows
5. The Agency Problem and Control of the Corporation

1. What is Corporate Finance? Concerned (from the perspective of a stock exchange- listed firm) with the:

◦ Investment (Acquisition)

◦ Financing

◦ Working Capital Management

Financing Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholder s’ Equity Current Liabilities Long-Term Debt

How should the

firm raise funds

for the selected

investments?

Working Capital Management Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholder s’ Equity Current Liabilities Long-Term Debt

How should

short-term

assets be

managed and

financed?

Net Working Capital

2. The Goal of Financial Management

To maximise the market value of the firm (equity) to its

owners (its shareholders)

◦ Market value = Share price of the company

◦ Share price represents the present value of future

cash flows expected to be provided by the firm

◦ This is what shareholders have a claim to

Value vs. price

The value of shares are not observable. In contrast, the

price of shares can be observable.

If one believes that share price is an accurate/good

estimate of share value , the appropriate goal would be

to maximize the price of shares.

Nature (^) of a Listed Company

Represents a separate ‘legal’ entity, with similar rights to

individuals

Owners are the shareholders who purchase the

company’s ordinary shares

Shareholders have a ‘ residual ’ claim to assets of the

company on liquidation

Most of these companies run by “ independent ’

managers appointed by the Board of Directors

(representing the shareholders)

Benefits (^) of a listed Company

Raising Capital : Can access and raise large amounts of

capital (this is the primary reason for listing)

Ownership Transferring: Ownership (shares) is easily

transferable between owners (buying and selling on the

Stock market)

Liquidity : The liquidity can reduce transaction costs

and in turn the cost of equity

Limited Liability : Liability of owners is limited to the

purchase price of their shares

Hypothetical Organization Chart 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

The importance of Cash Flow

• Identification of Cash Flow (CF)
  • Accounting Profit versus Cash Flow (Ex 1.1 p9) The Midland Co. refines and trades gold. At the end of the year, it sold 2 , 500 ounces of gold for $ 1 million. The company has acquired the gold for $ 900 , 000 at the beginning of the year. The company paid cash for the gold when it was purchased. Unfortunately it has yet to collect from the customer to whom the gold was sold. Calculate the Profit and Cash Flow at the end of the year? Profit = $100, Cash Flow = $