Chapter 1 Notes

Chapter 1 Notes - Chapter 1: Int roduction to Corporate F...

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Chapter 1: Introduction to Corporate Finance Corporate Finance and the Financial Manager What is Corporate Finance? - If you started your own business, no matter what type, you would have to answer 3 questions in some form or another: 1) What long-term investments should you take on? That is, what lines of business will you be in and what sorts of buildings, machinery, and equipment will you need? 2) Where will you get the long-term financing to pay for your investment? Will you bring in other owners or will you borrow the money? 3) How ill you manage your everyday financial activities such as collecting from customers and paying suppliers? - Corporate finance, broadly speaking, is the way to answer these 3 questions The Financial Manager - In large corporations, owners (stockholders) are usually not directly involved in making business decisions, particularly on a day to day basis - Corporation employs managers to represent the owners’ interests and make decisions on their behalf - In a large corporation, the financial manager would be in charge of answering the 3 questions we raised in the preceding section - Usually associated with a top officer of the firm, such as a vice president of finance or some other chief financial officer (CFO) - Figure 1.1
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Financial Management Decisions - Financial manager must be concerned with 3 basic types of questions o Capital Budgeting o Capital Structure o Working Capital Management - Capital Budgeting o First question concerns firm’s long-term investments o Capital budgeting - process of planning and managing a firm’s long-term investments o Financial manger tries to identify investment opportunities that are worth more to the firm than they cost to acquire This means that the value of the cash flow generated by an asset exceeds the cost of that asset o Must be concerned not only with how much cash they expect to receive, but also with when they expect to receive it and how likely they are to receive it o Evaluating the size, timing, and risk of future cash flows is the essence of capital budgeting - Capital Structure o 2 nd question concerns ways in which the firm obtains and manages the long-term financing it needs to support its long term investments o Capital structure - the specific mixture of long-term debt and equity the firm uses to finance its operations o Has 2 concerns in this area:
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1) How much should the firm borrow? a. What mixture of debt and equity chosen will affect both the risk and the value of the firm 2) What are the least expensive sources of funds for the firm? o What percentage of the firm’s cash flow goes to creditors and what percentage goes to shareholders o Financial manager has to decide exactly how and where to raise the money o Choosing among lenders and among load types is another job handled by the financial manager - Working Capital Management o 3 rd question concerns working capital management o Working capital management - refers to a firm’s short-term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers
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Chapter 1 Notes - Chapter 1: Int roduction to Corporate F...

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