Chap_1 - EMBA 807 Corporate Finance Dr. Rodney Boehme...

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EMBA 807 Corporate Finance Dr. Rodney Boehme Page 1 CHAPTER 1: INTRODUCTION TO CORPORATE FINANCE What is Corporate Finance? In this course, we will examine the activity of employing scarce resources in the pursuit of real activities. From our corporate finance perspective, the scarce resource used or consumed in this real activity is the capital from those individuals that choose to invest in the firm or business. The capital exists in two forms: debt and equity (stock). These two claims represent what individuals have invested into the firm. Investors (equity and debt owners) only provide this capital to the firm because they expect to become wealthier as a result. Corporations use this scarce capital to invest in real assets (real investments such as plant, property, equipment, R&D, training, etc.) in order to produce current and future real goods and services in the economy. The debtholders and stockholders that provide this scarce resource (capital) to the corporation expect to earn an adequate rate of return on their financial investments. The ideal real corporate investment is one that is expected to produce a higher return than the minimum return (cost of capital) that investors expect. 1 Such an investment has Positive Net Present Value (NPV) and creates wealth for the stockholders or owners of the firm. Positive NPV means that the investment or project is worth more than the resources needed to create the project (economic return or benefit exceeds economic cost). These financial claims (stocks and bonds) on the firm’s cash flow that corporations issue are the focus of Investments. The value of a corporation’s stocks and bonds derives from the expected future cash flow that will be paid out by the corporation. The marketplace is what sets the value of the stocks and bonds of corporations. In a very real sense, the market evaluates a corporation and its managers every day. Current bond and stock prices reflect current expectations of future performance. 1 This is the return that investors can expect to earn elsewhere on investments of comparable risk.
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EMBA 807 Corporate Finance Dr. Rodney Boehme Page 2 Financing and Capital Structure: The accounting book values and actual market values of assets, debt, and equity can be very different. Whether we examine book or market value, the fundamental accounting equation holds: Assets = Liabilities + Equity The book and market values of an actual corporation may resemble the following tables. The first table reports the accounting book values (historical amounts). Assets (book value) Liabilities + Owner’s Equity (book value) Assets 6000 Debt 2000 Equity 4000 Total 6000 Total 6000 However, in finance we are more concerned with the actual current market values of the assets, debt, and equity. Assets
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This note was uploaded on 06/19/2011 for the course ECON 1000 taught by Professor Josh during the Three '11 term at University of Adelaide.

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Chap_1 - EMBA 807 Corporate Finance Dr. Rodney Boehme...

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