Introduction to

Corporate
Finance
By Dr. Manmeet kaur
 Topics Covered
• Corporate Investment and Financing Decisions.

• The Financial Goal of the Corporation.

• Preview of Coming Attractions.

Corporate Real assets.
01
Investment and • Assets used to produce goods and services.

Financing Investment decision relates to

Purchase of real assets.

Decisions 02
Financial assets.
• Financial claims to the income generated by
the firm’s real assets.

Financing decision relates to

Sale of financial assets.
Investment Decisions

Capital budgeting decision.

Decision to invest in tangible or intangible

assets.

Also called the investment decision.

Also called capital expenditure or CAPEX

decisions.
.
Table 1.1 Examples of Recent Investment and Financing
Decisions by Major Public Corporations
Company Recent Investment Decisions
Intel (U.S.) Invests $7 billion in expanding
semiconductor plant in Chandler,
Arizona.
Amazon (U.S.) Acquires self-driving start-up, Zoox,
for over $1.2 billion
Tesla (U.S.) Announces construction of new
plant to build the electric
Cybertruck
Shell (U.K./Holland) Starts production at a deep-water
development in the Gulf of Mexico
GlaxoSmithKline (U.K.) Spends $6 billion on research and
development for new drugs.
Ørsted (Denmark) Completes a 230-MW wind farm in
Nebraska
Unilever (U.K./Holland) Spends $8 billion on advertising
and marketing
Carnival Corporation Launches four new cruise ships
(U.S./U.K.)
Recent Financing Decisions
Borrows $600 million from
Chandler Industrial Development
Authority.
Reinvests $33 billion that it
generates from operations
Announces plans to sell $2 billion
of shares
Cuts dividend to preserve cash
Raises $1 billion by an issue 8-
year bonds
Arranges a borrowing facility with
14 international banks
Pays a dividend and completes
$200 million program to buy back
shares
Raises $770 million by sale of
bonds; each bond can be
converted into about 19 shares
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 Financing Decisions
1. Shareholders are equity investors.

2. Contribute equity financing.

3. Capital structure decision.

4. Choice between debt and

equity financing.’
 What Is a Corporation?

A business organized as a separate legal

entity owned by shareholders.
.

Types of Corporations.

1. Public companies.
2. Private corporations.
3. Limited liability
corporations (L LC).
Other Forms of Business Organization
• Sole proprietorships.
• Partnerships.
• Corporations.
• Limited liability options.
• Limited liability partnerships.
• Limited liability companies.
• Professional limited liability companies.

• Limited liability: The owners of a corporation are not

personally liable for its obligations.

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Figure 1.1 Flow of Cash Between Financial Markets and the Firm’s Operations

• 1) Cash raised by selling financial assets to investors.

• 2) Cash invested in the firm’s operations and used to
purchase real assets.
• 3) Cash generated by the firm’s operations.
• 4) (a) Cash reinvested (b) Cash returned to investors.

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 The Financial Goal of the
Corporation
Stockholders want three things.

• To maximize current wealth.

• To transform wealth into most
How can the financial manager help the
desirable time pattern of
shareholder?
consumption.
• To manage risk characteristics of Maximize Wealth (Fisher
chosen consumption plan Separation Theorem)
 The Financial Goal of the Corporation

• Profit
Not a well-defined financial objective. maximization

Which year’s profits? • Shareholders will not welcome higher short-term profits if
long-term profits are damaged.

• Company may increase future profits by cutting year’s

dividend, investing freed-up cash in firm.

• Not in shareholders’ best interest if company earns less than

opportunity cost of capital.
 Agency Problem

Managers are agents for stockholders and are Agency cost.

01 tempted to act in their own interests rather
than maximizing value.
02

Value lost from agency problems or from the cost of mitigating

agency problems.

Do managers maximize shareholder wealth or Corporate governance

03 manager wealth? 04

The laws, regulations, institutions, and corporate practices that

protect shareholders and other investors.
 Corporate Governance

• “Corporate Governance is the system by which companies are

directed and controlled…”
Cadbury Report (UK), 1992

• “…to do with Power and Accountability: who exercises power, on

behalf of whom, how the exercise of power is controlled.”
Sir Adrian Cadbury, in Reflections on Corporate
Governance, Ernest Sykes Memorial Lecture, 1993

• Primarily concerned with public listed companies

i.e. those listed on a Stock Exchange

• Focused on preventing corporate collapses

such as Enron, Polly Peck and the Maxwell companies
 Four Pillars
of Corporate Governance
Transparency

Fairness Accountability
You can simply impress your audience You can simply impress your audience
and add a unique zing and appeal to your and add a unique zing and appeal to your
Presentations. Presentations.

Responsibility
Should Managers Maximize Shareholder Wealth?
• Managers have many constituencies or stakeholders.

• Stakeholder: Other parties affected by the company, such

as customers, employees, suppliers, the environment,
communities, and taxpayers.

• Should managers work for shareholders or stakeholders?

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 Investment Trade-Off
Hurdle rate/cost of capital.

Minimum acceptable rate of return on

investment.

Opportunity cost of capital.

Investing in a project eliminates other

opportunities to use invested cash.
Figure 1.2 Investment Trade-Off

• Arrows represent possible cash flows or transfers.

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