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Corporate Finance: Introduction

In the realm of corporate finance, financial managers play a critical role in understanding key concepts and strategies to enhance firm value. They must grasp the time value of money, evaluate a firm's financial health, forecast future performance, and make informed investment and financing decisions. Managers should aim to maximize shareholder wealth by effectively managing risks while addressing agency problems. Insights into financial statements, market analysis, and sound decision-making are essential for navigating the complexities of corporate finance and ensuring sustainable growth.

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Corporate Finance: Introduction

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  1. Corporate Finance:Introduction Professor Scott Hoover Management 221

  2. What must a financial manager understand? • …must understand how to value future cash flows (time value of money) • important factors • …must understand how to evaluate the health of a firm • ability to repay debt / ability to take on more debt • profitability • efficiency • Source of information • financial statements • press releases • news event • “expert” analyses

  3. …must understand how to forecast and plan accordingly • Why? • investment decisions (long-term decisions) • operational decisions (day-to-day decisions) • growth management • financing decisions

  4. …must understand how to identify optimal financing arrangements • instruments • leverage vs. risk • tax effects • …must understand how to evaluate potential investments • risk vs. return • relevant cash flows

  5. Firm managers • the ideal goal of firm managers • maximize income?…no • maximize profits?…no • Why not? • ignores timing • ignores risk • ignores dividend (to maximize profits, we would never pay dividends) • maximize firm value?…no • maximize shareholder wealth?…yes!

  6. Agency problems: Do firm managers always act to maximize shareholder wealth?…no • Example: GM •  agency costs • monitoring expenditures • expenditures for “preventive” structuring of the firm (so that managers have reduced incentives to act against the shareholders’ best interests • lost profits due to missed opportunities • mitigating factors • performance-based salaries • shareholder intervention (including firing firm managers) • possible takeovers

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