Chapter 1 Overview of Corporate Finance Lesson

Chapter 1.
Corporate Finance 2023
CORPORATE FINANCE
TÀI CHÍNH DOANH NGHIỆP
Objective of Course
▪ Understand general concepts in corporate finance;
▪ Explain the goals of financial management and the importance

financial decisions of firms;
▪ Appy to financial models and financial theories to explain financial

decisions of firms;
▪ Explain the capital structure theories and relationship between

capital structure and firm values;
▪ Be careful in collecting financial data, valuating financial information

of firms.
Lephanthidieuthao@hub.edu.vn 1
Chapter 1. Corporate Finance 2023
REFERENCES
• Ross, S., Westerfield, R. and Jordan, B. (2018), Fundamentals of

Corporate Finance, 12th edition, McGraw-Hill;
• Geoffrey A. Hirt, Stanley B. Block, Barley R. Danielsen (2011),
Corporate Finance Foundations, McGraw-Hill Irwin
• Richard Brealey, Stewart Myers and Franklin Allen, Principles of
Corporate Finance (10th ed.), McGraw-Hill, 2011
• Ross, S.,
Westerfield, R.
and Jordan, B.
(2018),
Fundamentals
of Corporate
Finance, 12th
edition,
McGraw-Hill;
Course Outline
Chapter 1. Overview of Corporate Finance
Chapter 2. Time Value of Money
Chapter 3. Risk and Return
Chapter 4. Cost of Capital
Chapter 5. Theory of Capital Structure
CHAPTER 1.
OVERVIEW OF CORPORATE FINANCE
TỔNG QUAN VỀ TÀI CHÍNH DOANH NGHIỆP

6
Learning Objectives
After finishing this chapter, students should be able to:
▪ Understand general concepts in corporate finance;
▪ Explain goals of financial management;
▪ Understand financial management decisions;
▪ Understand factors that affect corporate finance;
▪ Calculate basic profit measures in finance.
Chapter Outline
1.1. Definition
1.2. The goal of financial management
1.3. Financial management decisions
1.4. Factors affect corporate finance
1.5. Calculate basic profit measures in finance
1.1. Definition
What is corporate finance?
Imagine that you were to start your own business, What would you
concern to? Or What questions should you answer?
1.1. Definition
Corporate finance
Every decision made in a business has financial implications and any decision
that involves the use of money is a corporate financial decision.
Damodaran, 2014, p. 1
Corporate finance is the subfield of finance that deals with how corporations
address funding sources, capital structuring, accounting, and investment
decisions. Or,
Corporate finance is the area of finance that deals with sources of funding, the
capital structure of corporations, the actions that managers take to increase
10
1.1. Definition
Forms of Business Organization
• Sole Proprietorship
• Partnership
• Corporation
11
1.1. Definition
• Sole Proprietorship: a business owed by one person; unlimited liability
• Partnership: similar to a proprietorship except there are two or more

owers.
• A general partnership: unlimited liability for all partnership debts, not
just some particular share.
• Limited partnership: one or more general partners will run the

business and have unlimited liability, but there will be one or more
limited partnership who will not actively participate in the business.
• Limtied company (Ltd.),,
12
1.1. Definition
• Corporation: A corporation is a legal “person”, separate and distinct

from its owners & it has many of the rights, duties and privileges of
an actual person. Joint Stock company, public limited company, the
limited liability company (LLC)
The object of study of this course is corporate finance of Joint- stock

company
13
1.1. Definition
Forms of Business Organization in Vietnam
• Sole Proprietorship
• Partnership: a general partner or a limited partner.
• Limited Liability Company: a single-member limited liability company

or multiple-member limited liability company.
• Joint Stock Company,
• State-Owned Enterprise: an enterprise more than 50% charter

capital or voting shares of which is held by the State.
• Article 4, Law On Enterprises, 2020
14
A Simplifed
Organization
Chart
15
1.1. Definition
Financial relationships of enterprises

▪ Financial relationship between enterprises and the state
▪ Financial relationship between enterprises and the market
▪ Financial relations within the business
16
Let list some goals of financial management
17

The goals we just listed can be classified in two groups:
In practice, these two goals contradict each other
Can we have a common goal that encompasses both groups?
18
The goal of financial management is to maximize the current value

per share of existing stock.
So, another definition of corporate finance
Corporate finance as the study of the relationship between business

decisions and the value of the stock in the business.
Ross et al., 2018, p. 9
19
The primary objective of the corporation: value maximization
Maximizing intrinsic stock value is the most important objective for

most corporations.
Brigham, E.F. và Ehrhardt, M.C., 2011
20
Three types of shareholder value should be distinguished
• Book value
• Market value
• Intrinsic value
21
To maximize shareholder value, a business must be able to generate

cash flows now and in the future.
• The ability to generate cash flow
• Time of cash flow
• Stability of cash flow
Note: distinguish between Cash Flow (Dòng tiền) and Profit (Lợi nhuận)
22

Agency Relationship
Agency relationship is relationship between stockholders and managers. It

exists whenever someone (the principal) hires another (the agent)
represent his interests.
Agency Problem
There is a possibility of conflict of interest between the principal

(shareholders) and the agent (managers)
Ross et al., 2018, p. 10
23
Agency costs
Agency costs occurs when managers do not attempt to maximize

firm value and shareholders incur costs to monitor the managers
and constrain their actions.
Brealey et al., 2020, p. 12
24
The
Balance
Sheet
25
1.3.1. Investment decisions (Quyết định đầu tư)
1.3.2. Financing decisions (Quyết định tài trợ)
1.3.3. Assets management decisions (Quyết định quản trị tài sản)
Note: some textbooks do not list assets management decisions as the

third decision, instead they prefer dividend decisions
26
1.3.1. Investment Decision
• Purchasing real assets, often referred to as capital budgeting
• Investment decisions determine the type and proportion of each

type of asset in the total assets of enterprises. There are two
types of assets: current assets and fixed assets.
• Investment decisions are related to the structure on the left side

of the balance sheet.
• The investment decision is important because it generates cash

flow, which in turn affects the value of the company.
27
1.3.1. Investment decisions
Current assets Fixed assets
28

1.3.2. Financing Decision
Decisions regarding raising money to finance the purchase of real

assets are known as financing decisions. To raise capital, companies
can borrow from a bank or/and issue securities (financial assets).
▪ Short-term funding
▪ Long-term funding
This decision represents the capital structure
29
1.3.2. Financing decisions

Short-term financing Long-term financing
30

1.3.2. Financing decisions
Debt Equity
31
32
1.3.3. Assets management decisions

Often related to short-term assets management, including:
• Cash
• Inventory
• Account receivables
• Account payables
33

1.3.3. Assets management decisions
▪Short-term operating cash flows often changes and is uncertain
about the time it arises, so it is necessary to calculate a reasonable
level of reserve to ensure the stability of cash flows.
▪ Asset management decisions (or short-term financial management

decision) are closely related to the net working capital management
of the enterprise.
▪This decision concerns the upper part of the balance sheet.
34
▪ Financial environment
▪ Forms of business organization
▪ Characteristics of business
▪ Regulation and Policy of Goverment
▪ Corporate Taxes
35
1.4.1. Financial environment
▪ Financial markets: market capitalization, liquidity, transparency, efficiency
▪ Financial assets: quantity, type, liquidity of securities traded on the market
▪ Financial institutions: number, size, type of financial institutions, etc.
▪ Financial infrastructure: regulation, supervisory systems, information

technology, etc.
36
37
1.4.2. Forms of business organization
▪ Sole Proprietorships,
▪ Partnerships, limited liability partnerships (LLPs)
▪ Limited liability companies (LLCs),
▪ Joint –stock company,
▪ State Enterprise
38
1.4.3. Characteristics of business
• Type of business
• Age, reputation, brand of the company
• Characteristics of directors, managers
• Labor quality, management information system
39
1.4.4. Regulation and Policy of Goverment
• Monetary policy, interest policy, exchange rate,
• Environment regulation
• Labor policy
• Finance Policy of Goverment for SMEs, etc.
40
1.4.5. Corporate Taxes
All expenses that are deductible for tax purpose can generate tax
shield (Lá chắn thuế).
Tax shield = Expenses * tax rate
41

Tax shield example
J&J Inc. has total assets of $1000. It generates revenues of $1000. It incurs
operating costs of $600 and a corporate tax rate of 20%. Consider 4 scenarios
of J&J capital structure as follows:
1. J&J has 100% equity
2. 60% equity, 40% debt (8% interest rate)
Calculate tax shield for each scenario?
42
Important Financial Indicators

Measures of Profits
Profit indicators are on the Income Statement
EBITDA: Earnings Before Interest, Taxes, Depreciation, & Amortization.
EBIT: Earnings Before Interest and Taxes
EBT: Earnings Before Taxes
EAT: Earnings After Taxes or Net Income (NI)
EPS: Earnings Per Share
DPS: Dividend Per Share
43
EBITDA = Revenues (or Sales) – Operating Costs

EBIT = EBITDA - Depreciation & Amortization Costs
EBT = EBIT – Interest Cost
EAT = EBT – Taxes Cost = (EBIT – I)*(1-t)
EAT
EPS = Common shares outstanding
Dividends paid to common stockholder
DPS = Common shares outstanding
Notes: t is corporate income tax rate
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Chapter 1.

Corporate Finance 2023

TÀI CHÍNH DOANH NGHIỆP

▪ Explain the goals of financial management and the importance

▪ Appy to financial models and financial theories to explain financial

▪ Explain the capital structure theories and relationship between

▪ Be careful in collecting financial data, valuating financial information

• Ross, S., Westerfield, R. and Jordan, B. (2018), Fundamentals of

Chapter 1. Overview of Corporate Finance

Chapter 2. Time Value of Money

Chapter 3. Risk and Return

Chapter 4. Cost of Capital

Chapter 5. Theory of Capital Structure

OVERVIEW OF CORPORATE FINANCE

TỔNG QUAN VỀ TÀI CHÍNH DOANH NGHIỆP

After finishing this chapter, students should be able to:

▪ Understand general concepts in corporate finance;

▪ Explain goals of financial management;

▪ Understand financial management decisions;

▪ Understand factors that affect corporate finance;

▪ Calculate basic profit measures in finance.

1.2. The goal of financial management

1.3. Financial management decisions

1.4. Factors affect corporate finance

1.5. Calculate basic profit measures in finance

Forms of Business Organization

• Sole Proprietorship: a business owed by one person; unlimited liability

• Partnership: similar to a proprietorship except there are two or more

• Limited partnership: one or more general partners will run the

• Limtied company (Ltd.),,

• Corporation: A corporation is a legal “person”, separate and distinct

The object of study of this course is corporate finance of Joint- stock

• Partnership: a general partner or a limited partner.

• Limited Liability Company: a single-member limited liability company

• Joint Stock Company,

• State-Owned Enterprise: an enterprise more than 50% charter

• Article 4, Law On Enterprises, 2020

Financial relationships of enterprises

1.2. The goal of financial management

Let list some goals of financial management

1.2. The goal of financial management

In practice, these two goals contradict each other

Can we have a common goal that encompasses both groups?

1.2. The goal of financial management

The goal of financial management is to maximize the current value

So, another definition of corporate finance

Corporate finance as the study of the relationship between business

Ross et al., 2018, p. 9

1.2. The goal of financial management

The primary objective of the corporation: value maximization

Maximizing intrinsic stock value is the most important objective for

1.2. The goal of financial management

Three types of shareholder value should be distinguished

1.2. The goal of financial management

To maximize shareholder value, a business must be able to generate

1.2. The goal of financial management

Agency relationship is relationship between stockholders and managers. It

There is a possibility of conflict of interest between the principal

Ross et al., 2018, p. 10

1.2. The goal of financial management

Agency costs occurs when managers do not attempt to maximize

Brealey et al., 2020, p. 12

1.3. Financial management decisions