week 1 - Week1 n Introduction to Finance q q q What is...

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11 Week 1 n Introduction to Finance q What is Corporate Finance? q The Corporate Firm q Goals of the Corporate Firm n Time Value of Money q Future Value (FV) and Compounding q Present Value (PV) and Discounting q The Net Present Value Rule q PV with Repeated Payments: Some Simplifications
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22 What is Finance?   n Finance (Wordnet, Princeton University) 1. finance = the commercial activity of providing funds and capital 2. finance = the management of money 3. finance = the branch of economics that studies the management of money and other assets
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33 What is Corporate Finance? Corporate Finance addresses the following three questions: 1. What long-term investments should the firm engage in? 2. How can the firm raise the money for the required investments? 3. How much short-term cash flow does a company need to pay its bills?
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44 Relevance of Finance n When we get good answers to those three questions, companies make money q Earn more than the cost of capital or required rate of return n Countries that have well-functioning financial markets prosper q Holland, England, USA…
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55 The Balance-Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt Total Value of Assets: Total Firm Value to Investors:
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66 The Balance-Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt What long- term investments should the firm engage in? The Capital Budgeting Decision
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77 The Balance-Sheet Model of the  How can the firm raise the money for the required investments? The Capital Structure Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt
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88 The Balance-Sheet Model of the  How much short- term cash flow does a company need to pay its bills? The Net Working Capital Investment Decision Net Working Capital Shareholders’ Equity Current Liabilities Current Assets Fixed Assets 1 Tangible 2 Intangible Long-Term Debt
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99 Capital Structure The value of the firm can be thought of as a pie. The goal of the manager is to increase the size of the pie. 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. 70% Debt 30% Equity
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1010 The Financial Manager The Financial Manager’s primary goal is to increase the value of the firm by: 1. Selecting value creating projects 2. Making smart financing decisions
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1111 Hypothetical Organization Chart Chairman of the Board and Chief Executive Officer (CEO) Board of Directors President and Chief Operating Officer (COO) Vice President and Chief Financial Officer (CFO) Treasur er Controll er Cash Manager Capital Expenditures Credit Manager Financial Planning Tax Manager Financial Accounting Cost Accounting Data Processing
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1212 C a s h fl o w fi r m ( C ) The Firm and the Financial Markets Taxes (D) Firm Government Firm issues securities (A) Retained
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week 1 - Week1 n Introduction to Finance q q q What is...

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