Jan11 Intro

8/7/2019 Jan11 Intro

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Introduction and Syllabus

n overv ew o t e ourse

Introduction to Corporate Finance

0-1BAFI 355 Spring 2011


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BAFI 355: Corporate Finance

An Overview



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Many issues in Finance, but in the end what wewant is to value some asset

+++

++

+=

nt

n

n

2

2

1

1

CF

r)(1r)(1r)(1Value L

+=

=1tt.

r)(1

To estimate an assets value, one estimates thecash flow for each period t (CFt), the life of the


,


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,dollar today, or to receive

$1 after one year?

$1 today!



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How much will my mortgage payments be?

Please enter your information below (For yourconvenience we have filled in common values. Feelree o c ange amoun s as ey app y o your

situation.)

Loan Amount 100,000

= +

=1t 12/%7

menor gage ayt

t

)(1100,000

Term in Years

No of Payments

Interest Rate of the Loan

360

7%



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Overview of Accounting and

Balance sheet Income statement

a es

Debt

Net sales 3,000.00

Operating costs 2,616.20

EBITDA 383.80

Equity

.

Amortization 0.00

EBITDA 283.80

Less interest 88.00

EBT 195.80

Taxes (40%) 78.30

Net income 117.50

0-6BAFI 355 Spring 2011The bottom line: accounting

finance!


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A simple IOU:$100 due in 1 yearA simple IOU:

$100 due in 1 year

0 10 1RedDate Coupon Price Yield

US Bonds

100 100PV = ? 100PV = ?7/07 3.88 99.7344 4.02

8/10 4.13 100.195 4.08

8/15 4.25 100.293 4.21

1r)(1 +Source: Financial Times, 08/22/2005



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ea ures o common s oc

Determining common stock

Preferred stockStock price = $504



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,invested in either Asset A

or Asset B. They are It depends

expected to give you thesame return of 10%.

Which one should you choose?



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A firms raises capital to invest ina es

projects

The cost of capital will determineDebt

Equity

which projects to take

Thus we need to measure the

cost o cap ta



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Should we A firmu s

plant?

investment

decision The methods:

payback, NPV,

IRRnn11 r)(1r)(1ueProjectVal

+++

+=

L



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Making Capital Investment

Going forward with

Identifying project

cash flows

nn11

CFCFueProjectVal ++=

L

Detailing projectrisk

thinking



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Overview of Capital Structure and

a es

Debt

rm ec es on:

The capital structure

Equity

How to pay back investors

,



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Introduction to



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Understand Corporate Finance

What are the financial managementdecisions?

What is a Corporation?

The goals of a Corporation



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Capital budgeting

W at ong-term investments or projects s ou t e

business take on?

How should we pay for our assets? Should we use debt

or equity? How should we give money back to

Working capital management

- -

firm?



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Money and capital markets

Investments

finance)



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Alternative Forms of Business

Sole proprietorship

Partnership



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Sole proprietorships &

No distinction between ownership and control

vantages Ease of formation

No corporate income taxes

Disadvanta es Limited life

Unlimited liability

cu o ra se cap a



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A legal entity, separate and distinct from its ownersand mana ers

Advantages Unlimited life Eas transfer of ownershi Limited liability Ease of raising capital

Disadvanta es Double taxation Cost of set-up and report filing Separation of ownership and management

80% of all business in US conducted by corporations



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Thus, our course is about financial management

x r r

Assets Liabilities

Debt

Investment decisions

Financing decisions

EquityDividend policy

decisions



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What are the Goals of a

General Motors is not in the business of making automobiles. .

Alfred P. Sloan

Employees

OwnersGovernment

Corporation

CommunityClients



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Owners

Employees

GovernmentCorporation Owners

Employees

GovernmentCorporation

r mary nanc a goa s

shareholder wealth

CommunityClients

CommunityClients

In practice, this translates into

maximizing stock price

But, what to say of:

Social responsability

Social Welfare



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Business ethics

cs s requ re everyw ere

Social responsability

.shareholders objectives

Social welfare In well-functioning markets, maximizing stock

price maximizes social welfare



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Agency relationship

interest Stockholders (principals) hire managers (agents)

to run t e company

Agency problem

Management goals and agency costs



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Maximizing Stock Price?

, Projected cash flows

Timing of the cash

Riskiness of the cash



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+++=

n

n

2

2

1

1 CFCFCFValue L

+

==

n

1tt

t .r1

CF

To estimate an assets value, one estimates the,

asset (n), and the appropriate discount rate (r)

Throughout the course, we discuss how to

es ma e e npu s an ow nanc a managemenis used to improve them and thus maximize afirms value.



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+++= n21

CFCFCFValue L

=

+++

n

t

t .CF

rrr

=

the denominator in the expression above


Jan11 Intro

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