Corporate Finance

Trinh Thi Phan Lan, PhD

Finance and Banking Faculty

University of Economics and Business - VNU
Course Syllabus
 Lecture 1: Introduction to Corporate Finance (Chapter 1)
 Lecture 2: Financial Statements and Cash Flow (Chapter 2)
 Lecture 3: Financial Statements Analysis (Chapter 3)
 Lecture 4: Long-term Financial Planning Models (Chapter 3)
 Lecture 5: Time Value of Money (Chapter 4)
 Lecture 6: Bond and Stock Valuation (Chapter 8 & 9)
 Lecture 7: Net Present Value and Other Investment Rules (Chapter 5)
 Lecture 8: Making Capital Investment Decisions (Chapter 6)
 Lecture 9: Risk and Return (Chapter 10)
 Lecture 10: Cost of Capital (Chapter 13)
 Lecture 11: Cash Management and Short-term Finance (Chapter 26 & 27)
 Lecture 12: Credit and Inventory Management (Chapter 28)
Course Materials:
Course Evaluation:
 Chapter 1

Introduction to
Corporate Finance
Chapter objectives
After studying this chapter, you should be able to:
 Understand different forms of business
organization.
 Focus on the shareholders’ wealth
maximization principles as an operationally
desirable finance decision criterion.
 Explain F.M functions and its interaction with
other management functions.
Introduction to
Corporate Finance
1.1.Corporate Finance &Financial Manager
1.2.Form of Business Organization
1.3.The Goals of Financial Management
1.4. Functions of Financial Management
1.1 Corporate Finance &
Financial Manager

 1.1.1.What is Corporate Finance?

 1.1.2.What is Financial manager?
1.1.1 What is Corporate Finance?

 Corporate finance attempts to find the answers

to the following questions:
 What investments should the business take on?
THE INVESTMENT DECISION
 How can finance be obtained to pay for the required
investments?
THE FINANCE DECISION
 How to manage everyday financial activities : cash,
inventory…
THE WORKING CAPITAL DECISION
1.1.2 The Financial Manager
 Financial managers try to answer some or all of
these questions.
 The top financial manager within a firm is
usually the General Manager–Finance.
 Corporate Treasurer or Financial Manager oversees
cash management, cr
 edit management, capital expenditures and financial
planning.
 Accountant oversees taxes, cost accounting, financial
accounting and data processing.
COMPARATION

 CFO= CHIEF FINANCIAL MANAGER

CFO & CHIEF ACCOUNTANT???

 Organizational Chart
Board of Directors

Chairman of the Board

and CEO

President and COO

Vice President Vice President Vice President

Marketing Finance Production

Treasurer Controller
Career position in Financial Institutions
CEOs’ Earning
The Role of Financial Manager
 Raising of Funds
 Allocation of Funds
 Profit Planning
 Understanding Capital Markets
1.2 Forms of Business Organization
1.2 Forms of Business
Organization
 1.2 Forms of Business Organization
Ownership Ease of Ability to Raise Management Personal Income Tax Transfer of Dissolution
Form Formation Funds Liability Treatment Ownership
Individual Flexible,
Simple and Simple and
(Sole Limited independent, may Unlimited Single Excellent
inexpensive inexpensive
Proprietorship) lack expertise
Limited but
General superior to Designated
Moderately easy Unlimited Single Poor Fairly simple
Partnership individual partners
ownership
Limited but
Moderately Limited for Poor for
Limited superior to General partners or Time
difficult and limited Single general
Partnership general agents consuming
expensive partners partners
partnership
Simple but
Complex and Usually separate needs
Corporation Good Limited Double Superior
expensive from ownership shareholders’
approval
Corporation (joint stock company)
 1. Division of capital into shares. The capital of a company is
divided into shares of small denominations (mệnh giá) which are
readily transferable from one owner to another

2. Limited Liability. The liability of the members is generally
limited to the extent of the face value of the shares that a person
has agreed to take up. Whatever may happen to the company
and whatever may be the state of solvency of the company, his
total liability does not exceed the face value of the share (For
example Rs. 10/-in our case).

3. Separation of ownership from management. All the

shareholders do not manage the company themselves but they
leave the management into the hands of their representative and
trustees, i.e,. the Board of Directors.
 Question

Advantages and disadvantages of each form ?

 1.3.Goals

 Maximization of profit
 Maximization of shareholders’ wealth
 Maximization of profit

 Most people have been taught that the goal

of the firm is to maximize current profits
 This goal is inadequate for at least three
reasons:
 It ignores the time value of money
 It ignores risk
 It assumes Perfect Competition
 It ignores Social Responsibility

22
 Maximizing EPS

 Ignore time and risk of the expected benefit

 Market value is not a function of EPS. Hence
maximizing EPS will not result in highest price for
company & shares
 Maximizing EPS implies that the firm should make
no dividend payments so long as funds can be
invested at positive rate of return—such a policy
may not always work
Maximization of
Shareholders’ wealth (MSW)
 The correct goal of the firm is to maximize
shareholder wealth (i.e., shareholder’s
equity) or, equivalently, to maximize the
firm’s stock price.
 By this we mean to imply that the
managers of the firm work for the
shareholders
 For this reason, they have a duty to make
investments that are expected to increase
shareholder wealth
24
MSW (cont.)
 Shareholders’ wealth = Current stock price *
Numbers of Share Outstanding.
 MSW also includes Social Responsibility
QUESTION

Do Managers Act in Shareholders’ Interests?

Answer
The answer to this will depend on two factors:

 how closely management goals are aligned

with shareholder goals

 the ease with which management can be

replaced if it does not act in shareholders’
best interests.
Agency Problem/Conflict

 The conflict between the interest of shareholders

and managers or shareholders and creditors is
called agency problem/conflict and it results into
agency cost.
 Agency Cost: it includes all cost borne by the
shareholders to encourage managers to
maximize the firms stock price rather than act in
their own self-interest.
Stockholders Vs Managers

 Managerial Compensation
 Direct intervention by shareholders
 The threat of firing
 The threat of takeover. Hostile takeovers
 Alignment of Goals

The conflict of interests is limited due to:

 management compensation schemes

 monitoring of management

 the threat of takeover

 other stakeholders.
1.4. Functions of financial
management
Functions of financial management is to
study and implement:
(1) Investment decision
(2) Financing decision and
(3) Dividend decision
1.4.1. Investment decisions

 Capital budgeting
 Working capital management
1.1.4.1. Capital budgeting
 Capital budgeting is the planning and
control of cash outflows in the expectation of
deriving future cash inflows from investments
in non-current assets.

 Involves evaluating the:

 size of future cash flows
 timing of future cash flows
 risk of future cash flows.
Cash Flow Size
 Accounting income does not mean cash flow.

 For example, a sale is recorded at the time of

sale and a cost is recorded when it is
incurred, not when the cash is exchanged.
Cash Flow Timing
 A dollar today is worth more than a dollar at
some future date.

 There is a trade-off between the size of an

investment’s cash flow and when the cash
flow is received.
Cash Flow Timing
Which is the better project?
Future Cash Flows
Year Project A Project B
1 $0 $20 000
2 $10 000 $10 000
3 $20 000 $0
Total $30 000 $30 000
Cash Flow Risk
 The role of the financial manager is to deal
with the uncertainty associated with
investment decisions.

 Assessing the risk associated with the size

and timing of expected future cash flows is
critical to investment decisions.
Cash Flow Risk

Which is the better project?

Future Cash Flows

Pessimistic Expected Optimistic

Project 1 $100 000 $300 000 $500 000

Project 2 $200 000 $400 000 $600 000

1.1.4.2.Working Capital
Management
 How much cash and inventory should be kept
on hand?

 Should credit terms be extended? If so, what

are the conditions?

 How is short-term financing acquired?

1.4.2.Financing decisions
 The financing decisions are basically
concerned with the answers to following
questions:
- What should be the amount of the funds
that should be raised?
- What should be mix of equity and debt
capital in which the required amount of funds
should be raised? (capital structure)
1.4.3.Dividend Decision
 Involves the decision of whether to pay a
dividend to shareholders or maintain the
funds within the firm for internal growth.

 Factors important to this decision include

growth opportunities, taxation and
shareholders’ preferences.
 Summary
F. Management

Maximization of Share Value

Financial Decisions

Investment Financing Dividend Liquidity

Decisions Decisions Decisions Management

Trade off
Risk
Return
Case study : ANDY company
 Students are required to :
- Read the case
- Answer number of questions
Link jameboard
 https://jamboard.google.com/d/
1QP1vUfEc7wT2ZIiEuKNRFUiTTljMcpnI6xk
mfZv7sIQ/viewer?f=4