Fundamentals of Corporate Finance

1. Introduction to Corporate Finance

Dr. Liam Li
 LOS
1. Appraise and discuss financial management decisions and goals, agency problems
and financial markets
2. Validate all variables of time value of money by assessing future and present value
of investments, multiple cashflows, annuities and perpetuities
3. Calculate bond values and stocks prices while discriminating between their types
and characteristics
4. Assess and communicate basic financial statements and compute and interpret
financial ratios
5. Measure and appraise projects financial feasibility using capital budgeting
techniques
6. Assess portfolio risk and return, capital structure and determine a firm's overall
cost of capital
 Assessment and Grading
• Homework (20%): These assignments will be designed to reinforce your
understanding of the material and prepare you for class discussions. 10
weekly assignments+ 1 individual + 1 team. Find them inthe ‘Assignment’
tab. Follow the instructions in the assignments for your OGL as well.
• Mid-term Exam (20%): This will be our first major checkpoint, a chance for
you to showcase what you've learned up to that point. It weights 20% and
you need to attend the exam in-person the same time as your in-person
class on Sunday.
• Individual Assignment (15%): Investopedia simulation
• Team Assignment (20%): Teamwork makes the dream work!Collaborate
with your peers to tackle complex financial problems.
• Final Exam (25%): This is your opportunity to consolidate everything
you've learned throughout the course.
 Course Policies
• Attendance: Regular attendance is expected. Active participation enhances
your understanding and makes the material more engaging.
• Copyright: Be mindful of copyright laws when using course materials and
resources. We'll respect intellectual property rights throughout the course.
• Examinations: Make sure you're well-prepared for exams.
• Academic Integrity: Your work should be a reflection of your own
understanding and effort. Any form of cheating or plagiarism will not be
tolerated.

find comprehensive details about these policies on the website:

http://www.ucanwest.ca/about/policies
and more on the course shell in my announcements.
 Saturday morning: 7:40 am to 9:40 am

Link can be found on your course shell

Please feel free to book an appointment through email.

https://youtu.be/pGwdFIkbKZk?si=KewGtWlmHAAcYXy9
 Capital Budgeting
01
PART
Capital Structure
Working Capital
Business Ethics
Capital Budgeting About firm’s long-term investments

The process of planning and managing a firm’s long-term investments

is called capital budgeting. Investment opportunities: worth more than
cost. Dollarama opens a new branch?

Exercise: In this list of assets, circle the capital assets.

Vehicle Accounts Receivable Land Cash Supplies

Factory Machinery Inventory
Capital Structure (financial structure)

the specific mixture of short-term debt, long-term debt, and

equity the firm uses to finance its operations. Firm’s assets
go to different group.

Managers want to choose an optimal capital structure for their

company.
more debt or more equity?
interest rate?
cost of equity finance? Earnout Agreement
Working Capital
the difference between a firm’s short-term assets (eg. inventory) and its
short-term liabilities (eg. money owed to suppliers).

• Positive working capital: current assets > current liabilities,

likely have a greater ability to withstand financial challenges and the flexibility.
• Negative working capital: current assets < current liabilities,
• Managing the firm’s working capital is a day-to-day activity
The UCW Bookstore. On February 1st, the bookstore has several accounts with
balances:
Account ($)Balance
Cash 4,500
Accounts Receivable 1,200
Supplies 800
Inventory 20,500
Vehicles * 17,500
Equipment * 12,000
Accounts Payable 3,200
* newly acquired, with no accumulated depreciation

Assuming the assets and short-term liabilities listed are complete and the firm’s
assets are 60% financed by equity (relative to total liabilities), what would the firm’s
long-term liabilities and equity look like?
 Account Balance
Long-term Debt
Equity (Common Shares/stocks, net asset)

Total asset: add up from cash to equipment, $56500

Equity: 60% x $56500 = &33900,
Long-term Debt: $56500 - $33900 - $3200 = $19400
short term debt must be subtracted from total debt!
To summarise, the UCW Bookstore’s capital structure is as follows:

Account Category Total

Short-term Debt $3,200
Long-term Debt $19,400
Equity $33,900
Now, let’s work on the bookstore’s working capital calculation:
current assets balance($) current liabilities balance($)

Working Capital:
 current assets balance($) current liabilities balance($)
Cash 4,500 Accounts Payable 3,200
Accounts Receivable 1,200
Supplies 800
Inventory 20,500
Total 27,000 Total 3,200

Working Capital: Current assets less current liabilities $ 27,000 - $3,200 = $23,800
• A healthy firm should be able to cover short-term liabilities with its
current assets.
• An asset is considered to be more short-term/current or “liquid” if it
can be converted to cash quickly with minimal loss of value.
• Inventory is widely considered to be less liquid than other current
assets such as cash and short-term investments.
• Assets are typically listed in order of liquidity at the top of the balance
sheet.
Let’s analyze what we know about the UCW Bookstore so far. Is it in a
good financial position?
current assets balance($) current liabilities balance($)
Cash 4,500 Accounts Payable 3,200
Accounts Receivables 1,200
Supplies 800
Inventory 20,500
Total 27,000 Total 3,200

Current assets are much higher than current liabilities. There is a high
level of working capital. However, notice that inventory accounts for a lot
of the surplus. Cash is just enough to cover the accounts payables. Overall,
the bookstore is in a decent financial position.
Financing (debt and equity) means for a business such as the UCW
Bookstore can also be investment opportunities for other businesses or
individuals. For instance, an investor could offer cash in exchange for
common shares the firm is issuing to the public (common shares are also
exchanged between investors via a stock exchange such as the NYSE or
TSX). The investor may also decide to buy the company’s debt, where a
certain interest rate is promised for a specified time period.

As an investor, are you more likely to invest in the UCW Bookstore’s equity
or debt? Why? Are there any major factors which would influence your
decision?
Ethical considerations
Ethics are a major element of the finance industry. After major scandals or
financial events which majorly impact the broader economy, discussions of
ethical conduct tend to arise.
Can you think of some examples of this?

https://youtu.be/vMj0t2Vsyvs?si=8G4qGfiO6cscjJhH
Deceptive Financial Practices:

Enron Corporation:a Texas-based energy, commodities, and services company founded

in 1985. It grew rapidly to become one of the largest publicly traded companies in the
United States and was considered a pioneer in energy trading and innovation.

Enron’s downfall: massive accounting scandal involved deceptive financial practices.

Off-balance-sheet entities (SPEs), conceal debt/inflate profits.

Impact: December 2001, Enron filed for bankruptcy, one of the most significant
corporate collapses in American history. Lose jobs! Retirement savings! Financial losses.

corporate governance/auditing/regulatory oversight

Global Financial Crisis (2007-2008):
The Global Financial Crisis was a severe worldwide economic crisis that occurred from
2007 to 2008. It was one of the most significant financial meltdowns since the Great
Depression of the 1930s.

Interconnected factors:

• Housing Bubbles: massive housing bubble in the US. Speculative lending, surge in
subprime mortgage→inflated housing prices.
• Risky Financial Products: complex & opaque financial products (eg. MBS, CDOs) →
subprime mortgage.
• Weak Regulatory Oversight: inadequate oversight → risky lending
practices/excessive leverage.
1. Lehman Brothers: one of the oldest investment banks in the United States founded
in 1850, was heavily involved in the mortgage market and held a significant amount of
mortgage backed securities (MBS).
Filed for bankruptcy in Sep. 2008, one of the largest bankruptcies in the US history.
Triggered panic in global financial markets → severe worldwide economic downturn.

2.AIG (American International Group):a global insurance and financial services

corporation, known for its involvement in insuring various financial products, including
MBS and CDOs. Massive losses when the value of the assets (MBS) sharply declined.
The U.S. government provided a massive $182 billion bailout package to AIG.
Too big to fail?
Do you want the government use taxes you paied to rescue these troubled
companies?
Wells Fargo Fake Accounts Scandal (2016): one of the largest banks in the
United States, with a long history dating back to 1852. Wells Fargo employees
opened millions of unauthorized bank and credit card accounts in customers'
names to meet aggressive sales targets. Customers were charged fees for these
unauthorized accounts.
substantial fines, reputational damage, loss of customer trust.
Bernard L. Madoff Investment Securities LLC: Bernard L. Madoff Investment
Securities LLC was a prominent Wall Street investment firm founded by Bernard
"Bernie" Madoff. Bernie Madoff orchestrated a colossal Ponzi scheme,
promising consistent and high returns to investors. However, he used funds
from new investors to pay fictitious returns to earlier ones, all while falsifying
account statements to maintain the illusion of profitability.

money laundering, insider trading, etc.

Agency relationship

The relationship between shareholders and management.

An agency relationship commonly arises when someone,
known as “the principle” hires an agent to represent his or
her interests. In some cases, there is a possibility of a
conflict of interest arising with the agent having different
goals- this is known as an “agency problem”.
 As an example, let’s consider a house on sale for $2,000,000. The owner,
Anya, is willing to wait for the highest possible offer, as her plan is to move
to an apartment and use the house proceeds for her retirement and
inheritance to her grandson. The realtor, James, is expected to earn 3.5%
on the first $1,000,000 of the sale price and a 1.25% rate on any amounts
above a million. Additionally, James spends $300 a week in efforts to
complete the sale.
If an interested buyer offers $1,900,000 for the house, James would
make a solid commission on the sale ($46,250) and no longer have to
spend $300 a week trying to sell it. However, a $2,000,000 offer could
come a month later, netting Anya an extra $98,750. Meanwhile, James
would only get 1.25% of the additional $100,000, or $1,250. Even worse for
him, he would likely spend a total of $1,200 in the four weeks waiting for
the full-price offer, leaving him with merely $50 more for his added efforts!
Hence, a conflict of interest can arise with the $1,900,000 offer. James
may be pushy in getting his seller to accept the lower amount while the
holder of the valuable asset, Anya, may very well benefit greatly from
being more patient! Hence, Anya should be aware of this situation when
she considers James’s advice.

Can you think of some other examples of agency problems?

Corporate governance:

system by which a company is directed and controlled

(performance measurement), enhances shareholder confidence

some examples of corporate governmence?

Corporate social responsibility:

considering all stakeholders in decision making, “doing the right

thing”

Think about a scenario where a business does right by its

executive management and shareholders, but other parties may
be adversely impacted?

To exercise better corporate social responsibility, the business

could?
Now, let’s consider matters from an investing perspective. If you,
an ethical investor, were looking at investing in a business’s debt
or equity, what ethical considerations would be a part of your
investment decision? Are there industries you are not willing to
invest in, even for superior returns? If so, which industries?
THANK YOU