Introduction to

Corporate Finance
What is Business / Corporate Finance?
Corporate Finance addresses the following three questions:
1. What long-term investments should the firm choose?
2. How should the firm raise funds for the selected investments?
3. How should short-term assets be managed and financed?
Balance sheet model of the firm
Total Value of Assets: Total Firm Value to Investors:
Current
Liabilities
Current Assets
Long-Term
Debt

Fixed Assets
1 Tangible
Shareholders’
2 Intangible Equity
The Capital Budgeting Decision

Current
Liabilities
Current Assets
Long-Term
Debt

Fixed Assets
What long-term
1 Tangible investments Shareholders’
2 Intangible
should the firm Equity
choose?
The Capital Structure Decision

Current
Liabilities
Current Assets
Long-Term
How should the Debt
firm raise funds
for the selected
Fixed Assets
investments?
1 Tangible Shareholders’
2 Intangible Equity
Short-Term Asset ( Working Capital)
Management
Current
Liabilities
Current Assets
Net
Working Long-Term
Capital Debt

How should
Fixed Assets
short-term assets
1 Tangible be managed and
Shareholders’
financed?
2 Intangible Equity
The Financial Manager
• Finance activity is usually associated
with a top officer VP, CFO etc.
• Reporting to the chief financial officer
are the treasurer and the controller.
• Treasurer - cash flows, managing,
capital expenditure decisions, and
making financial plans
• Controller - accounting function,
which includes taxes, cost and
financial accounting, and information
systems
Financial Markets

Stocks and
Investors
Bonds
Firms securities
Money Bob Sue
money

Primary Market
Secondary
Market
Cash Flows between firms & Financial Market
The Goal of Financial Management
• What is the correct goal?
• Maximize profit?
• Minimize costs?
• Maximize market share?
• Maximize shareholder wealth?
Capital Structure
The value of the firm can be
thought of as a pie.
The goal of the manager is 70%50%30%
25%
to increase the size of the DebtDebt
Equity
pie.
75%
50%
The Capital Structure Equity
decision can be viewed as
how best to slice the pie.

If how you slice the pie affects the size of the pie,
then the capital structure decision matters.