Chapter 1

1. Chapter 1 Introduction To Corporate Finance

2. Chapter Outline • What is Corporate Finance? • The Corporate Firm • The Goal of Financial Management • The Agency Problem and Control of the Corporation • Financial Markets

3. What is Corporate Finance? Corporate Finance addresses the following three questions: • What long-term investments should the firm choose? • How should the firm raise funds for the selected investments? • How should short-term assets be managed and financed?

4. Balance Sheet of the Firm Total Value of Assets: Total Firm Value to Investors: Current Assets Current Liabilities Long-Term Debt Fixed Assets 1.Tangible 2.Intangible Shareholders’ Equity

5. The Capital Budgeting Decision Current Assets Current Liabilities Long-Term Debt Fixed Assets 1.Tangible 2.Intangible What long-term investments should the firm choose? Shareholders’ Equity

6. The Capital Structure Decision Current Assets Current Liabilities Long-Term Debt How should the firm raise funds for the selected investments? Fixed Assets 1.Tangible 2.Intangible Shareholders’ Equity

7. Net Working Capital Short-Term Asset Management Current Assets Current Liabilities Long-Term Debt Fixed Assets 1.Tangible 2.Intangible How should short-term assets be managed and financed? Shareholders’ Equity

8. 25% Debt 70% Debt 30% Equity 75% Equity Capital Structure The value of the firm can be thought of as a pie. 50% Debt The goal of the manager is to increase the size of the pie. 50% Equity The Capital Structure 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.

9. Investment • Return & Risk • Cost of Capital • Portfolio theory • Asset Pricing model • Term structure, Duration, Option Pricing model etc. • Risk Management

10. Financial Manager • The Financial Manager’s primary goal is to increase the value of the firm by: • Selecting value creating projects • Making smart financing decisions The top financial manager within a firm is usually the Chief Financial Officer (CFO) • Treasurer – oversees cash management, credit management, capital expenditures and financial planning • Controller – oversees taxes, cost accounting, financial accounting and data processing

11. Financial Accounting Capital Expenditures Financial Planning Cost Accounting Data Processing Credit Manager Cash Manager Tax Manager Board of Directors Controller Treasurer Chairman of the Board and Chief Executive Officer (CEO) Vice President and Chief Financial Officer (CFO) President and Chief Operating Officer (COO) Organization

12. Forms of Business Organization • Three major forms in the United States • Sole proprietorship • Partnership • General • Limited • Corporation • 우리나라의회사형태

13. Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate) Corporation

14. Corporation Partnership Liquidity Shares can be easily exchanged Subject to substantial restrictions Voting Rights Usually each share gets one vote General Partner is in charge; limited partners may have some voting rights Taxation Double Partners pay taxes on distributions Reinvestment and dividend payout Broad latitude All net cash flow is distributed to partners Liability Limited liability General partners may have unlimited liability; limited partners enjoy limited liability Continuity Perpetual life Limited life A Comparison

15. Goal Of Financial Management • What is the correct goal? • Maximize profit? • Minimize costs? • Maximize market share? • Maximize shareholder wealth?

16. Why Value Maximization? • Limitations of the profit maximization • Accounting approach • Single period • Not consider uncertainty • Objective: Maximizing Firm Value • From the stockholder’s point of view

17. The Agency Problem • Agency relationship • Principal hires an agent to represent his/her interest • Stockholders (principals) hire managers (agents) to run the company • Agency problem • Conflict of interest between principal and agent

18. Managerial Goals • Managerial goals may be different from shareholder goals • Expensive perquisites • Survival • Independence • Increased growth and size are not necessarily equivalent to increased shareholder wealth

19. Managing Managers • Managerial compensation • Incentives can be used to align management and stockholder interests • The incentives need to be structured carefully to make sure that they achieve their intended goal • Corporate control • The threat of a takeover may result in better management • Other stakeholders

20. Financial Markets

21. Financial Markets • Primary Market • Issuance of a security for the first time • Secondary Markets • Buying and selling of previously issued securities • Securities may be traded in either a dealer or auction market • NYSE • NASDAQ • KOSPI • KOSDAQ

22. Investors Stocks and Bonds Firms Money Bob Sue Primary Market Secondary Market securities money Financial Markets

23. Web information • Information about individual companies • InternationalYahoo finance: http://finance.yahoo.comBloomberg • Domestic금융감독원 전자공시시스템: http://dart.fss.or.kr한국증권선물거래소: http://sm.krx.co.kr