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Chap1- Intro of Corporate Finance - Chapter 1 Introduction...

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Introduction to Corporate Finance Chapter 1
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Key Concepts and Skills Know the basic types of financial management decisions and the role of the Financial Manager Know the financial implications of the various forms of business organization Know the goal of financial management Understand the conflicts of interest that can arise between owners and managers Understand the various types of financial markets
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Chapter Outline 1.1 What is Corporate Finance? 1.2 The Corporate Firm 1.3 The Goal of Financial Management 1.4 The Agency Problem and Control of the Corporation 1.5 Financial Markets
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1.1 What is 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?
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Balance Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible Total Value of Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Total Firm Value to Investors:
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The Capital Budgeting Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt What long-term investments should the firm choose?
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Capital Budgeting Typically, capital budgeting is the process of determining and selecting the most profitable long-term projects Analysis of potential projects Long-term decisions; involve large expenditures Important to firm’s future
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The Capital Structure Decision How should the firm raise funds for the selected investments? Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt
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Capital Structure This represents the proportions of the firm’s financing from current and long-term debt and equity Typically, the optimal capital structure can be achieved when the financing mix result in the maximum firm value
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Short-Term Asset Management How should short-term assets be managed and financed? Net Working Capital Shareholders’ Equity Current Liabilities Long-Term Debt Current Assets Fixed Assets 1 Tangible 2 Intangible
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Net Working Capital Net working capital is defined as current assets minus current liabilities The short-term cash flow problem comes form the mismatching of cash inflows and outflows
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Changes in Net Working Capital Changes in net working capital are defined as the difference between the changes in current assets and changes in current liabilities If the change is positive, then additional financing is required and represents a cash outflow If the change is negative, the project frees up cash, creating cash inflow
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Capital Structure The value of the firm can be thought of as a pie.
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