Transcript FI3300 Corporation Finance

FINC3131
Business Finance
Chapter 1: Introduction & overview
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Learning Objectives
1. Identify 3 main subject areas in finance
2. Why sound financial management is vital to
survival in business
3. Difference between Finance (corporate
financial management) and Accounting
4. Relationship between cash and value,
Importance of cash
5. Goal of financial management
6. Describe different forms of business
organization
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Areas in Finance
1. Corporate finance (financial management)
2. Investments
3. Financial markets & institutions
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Why I need to learn Finance?
Suppose I want to be a money manager.
Q1: shall I buy stocks or bonds?
Q2: Which stocks shall I buy?
Q3: How to form an investment portfolio?
Q4: How to use derivatives to hedge the risk?
…..
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Why I need to learn Finance?
Suppose I want to buy a house with a
mortgage loan.
Q1: Shall I borrow fix-rate or flexible-rate loan?
Q2: Shall I borrow for 15 years or 30 years?
Q3: How much shall I repay the bank every
month?
Q4: How much can I save from paying the
interest?
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Why I need to learn Finance?
Suppose I am a marketing manager sitting with finance
guys and we are evaluating a potential project, producing iPad 7 . Finance guys are talking about NPV, the cost of
capital, operating cash flows, sunk cost, etc. And then they
reject the project based on their reasoning that the NPV of
the project is negative.
Q1: What is NPV, operating cash flows, etc?
Q2: How can I defend the project if I do not understand
those finance terms?
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Financial Management
Poor financial management can cause a firm to fail,
EVEN IF it efficiently produces, markets and
delivers a product that is in great demand.
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Corporate Finance vs. Accounting
Accounting
•
historically based/ backward looking
Corporate finance
•
forward looking
Corporate Finance (financial management) involves
analysis of income statement and balance sheet, as
financial statements provide information useful for
estimating future cash flows and firm value.
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Cash and Value
1. Relationship between cash (cash flows)
and value:
•
The value of an investment is determined by
the future cash flows that the investment
generates for the investor
2. Why focus on cash?
•
Simple, the only thing that investors
eventually want is CASH.
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Finance Within the Organization
Board of Directors
Chief Executive Officer (CEO)
Chief Operating Officer (COO)
Chief Financial Officer (CFO)
Marketing, Production, Human
Resources, and Other Operating
Departments
Accounting, Treasury, Credit,
Legal, Capital Budgeting, and
Investor Relations
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Primary Goal of
Financial Management/Managers
Maximize the wealth of stockholders/owners
Why? Stockholders invest in the firm because
they want to make money.
maximizing shareholders’ wealth is equivalent
to maximizing stock price per share or market
value of the firm
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Main forms of Business Organization
1.
2.
3.
4.
Sole proprietorship
Partnerships
Corporations
Limited liability companies (LLCs) and
Limited liability partnerships (LLPs)
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Sole proprietorship
1. Easily and inexpensively formed
2. 100% owned and managed by one
person
3. Few government regulations
4. Personal income taxes, no corporate
income taxes
5. Unlimited personal liability
6. Difficult to obtain large sums of capital
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Partnerships
1. Easily and inexpensively formed
2. Owned and managed by two or more
persons
3. Few government regulations
4. Personal income taxes, no corporate
income taxes
5. Unlimited personal liability
6. Difficult to raise large amounts of capital
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Corporations (C corporations)
1. Separation of ownership and
management.
2. Easier to transfer the ownership
3. Easier to raise the capital
4. Double taxation.
5. Limited liability
* S corporations are exempt from corporate income tax. (no
more than 100 stockholders)
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LLC and LLP
1. Limited liability
2. Personal income taxes, no corporate
income taxes
3. LLPs are used for professional firms in
accounting, law and architecture
4. LLCs are used by other businesses.
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