Corporate Finance Chapters 1-5 Unit 1.docx - Corporate Finance – Notes for Quiz 1 Chapters 1-5 Chapter 1 Goals and Governance of the Corporation

Corporate Finance Chapters 1-5 Unit 1.docx - Corporate...

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Corporate Finance – Notes for Quiz 1: Chapters 1-5 Chapter 1: Goals and Governance of the Corporation Investment and Financing Decisions Capital Budgeting Decision - Decision to invest in tangible assets and intangible assets o Tangible assets are assets you can physically touch o Intangible assets include research and development, advertising, and the design of computer software - Aka: The Investment Decision or Capital Expenditure (CAPEX) Decision - EX: - Most of these investments have long-term consequences. o EX: planes acquired by Virgin Atlantic may still be flying 20 or 30 years from now. - Other investments may pay off in only a few months. o EX: Walmart spends nearly $50 billion to stock up its warehouses and retail stores with Xmas coming. As the goods are sold over the following months, the company recovers its investment in these inventories. - The world of business can be intensely competitive, and corporations prosper only if they can keep launching new products or services. In some cases, the costs and risks of doing so are amazingly large. o EX: cost of developing the Gorgon natural gas field in Australia was estimated at $54 billion. Not surprising that cost is being shared among several major energy companies. But don’t think that companies make billion-dollar investments on a daily basis. Most investment decisions are smaller, such as the purchase of a truck, machine tool, or computer system. Corporations make thousands of such investments each year. The cumulative amount of these small expenditures can be just as large as the occasional jumbo investments. - Not all investments succeed. The Financing Decision - financial manager’s second responsibility is to raise the money that the firm requires for its investments and operations. - Decision on the sources and amounts of financing - Capital Structure o Mix of long term debt and equity financing o or it can promise to pay back the investors’ cash plus a fixed rate of interest. o Investors can pay cash for share of future profits
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receive shares of stock and become shareholders, part-owners of the corporation. The investors in this case are referred to as equity investors, who contribute equity financing. o Investors let company borrow money that must be paid back with a fixed rate of interest are lenders, that is, debt investors, who one day must be repaid. o Here “capital” refers to the firm’s sources of long-term financing. A firm that is seeking to raise long-term financing is said to be “raising capital.” - Difference between investment and financing decisions o Real Assets assets used to produce goods and services o Financial Assets Financial claims to the future assets generated by real assets the firm finances its investment in real assets by issuing financial assets to investors A share of stock is a financial asset: has value as a claim on the firm’s real assets and on the income that those assets will produce.
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