Corporate Finance chapter 1

What is a corporation
a business created as a distinct legal entity owned by one or more individuals or entities
What long-term investments should the firm choose?
Capital Budgeting
How should the firm raise funds for the selected investments?
Capital Structure
How should short-term assets be managed and financed?
Working Capital
Balance Sheet Model of the Firm is
Helpful to relate corporate decisions to individual circumstances.
ex: Choosing to buy a car or home.
This decision will affect personal Balance sheet
Balance sheet model of firm “Left side and Right side”
(Total Value of Assets)
Current Assets
Fixed Assets
(Total Firm Value to Investors)
Current Liabilities
Long Term Debt
Shareholders Equity
What is the Financial Managers primary goal?
Increase value of firm by:
1. Selecting Value Creating projects
2. Marking smart financing decisions
Corporate Firm
The standard method for solving problems encountered
What are the three forms of Business Organization?
The Sole Proprietorship
The partnership
-General Partnership
-Limited Partnership
The corporation
Is Net income a Cash Flow?
What is the importance of Cash Flow?
to create value from the firm’s capital budgeting, financing, and net working capital activities
Financial Managers created value by:
Firms trying to buy assets that generate more cash than they cost
2. Sell bind and stocks that raise more cash than what they cost
What is the correct goal for Financial Management?
Maximize Shareholder wealth
Example of Agency Relationship
Breaking it down between a buyers agent and a sellers agent
Classic conflict of interest is when the Agent
Is paid on Commission, so they will be less willing to let the buyer know that a lower price might be accepted
Ex: Homes, they will show the buyers high prices
Regulations that impact public firms
Securities Act of 1933 and the Securities Exchange Act of 1934
Sabanes-Oxley (SOX)