L_1_6 - Finance 365 Corporate Financial Analysis Lecture...

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Unformatted text preview: Finance 365 Corporate Financial Analysis Lecture Note Chapter 1-3 Corporate Finance deals with the following areas: Capital budgeting question Management of Cash, Assets, Liabilities Capital Structure, M&A, IPO, SEO Executive Compensation, Governance, Frauds, Corporate Finance Answers questions such as: What long-term investments should we make? Where will we get the funds to pay for our investment? How will we collect from customers and pay our bills? Corporate Finance A Simplified Organizational Chart Controller handles cost and financial accounting, tax payments and information systems. Treasurer handles cash management, financial planning, and capital expenditures. Corporate finance is concerned with the issues faced by the treasurer . Financial Management Decisions The financial manager (the treasurer) is concerned with three primary corporate financial decisions. Capital budgeting process of planning and managing a firm's investments in fixed assets. The key concerns are the size , timing , and riskiness of cash flows. Capital structure mix of debt and equity used by a firm. What are the least expensive sources of funds? Is there a best mix? When and where to raise funds? Working capital management managing short- term assets and liabilities. How much cash and inventory to hold? What is our credit policy? Where to obtain short-term or long-term loans? The Goal of Financial Management What are firm decision-makers hired to do? General Motors is not in the business of making automobiles. General Motors is in the business of making money. --Alfred P. Sloan Possible goals of financial management? Maximize profit? Minimize Costs? Increase Cash Flow? Provide good employment? The Goal of Financial Management Equivalent goals of financial management: Maximize shareholder wealth Maximize share price Maximize firm value The Agency Problem The agency relationship is the relationship between principal (shareholders) who pays agent (management) to represent them Will managers work in the shareholders best interests? Not Necessarily !! The Agency Problem Agency costs is conflicts of interest between the parties: between shareholders and managers Management goals (may differ from the goals of shareholders): safe job, excessive perks better pay less efforts The Agency Problem Examples of Management actions that dont benefit shareholders: Make the firm bigger firm, although less effective Suboptimal decisions such as: merges, acquisitions, unprofitable investments, equity issues Passing up good projects: lost opportunities Dont take risk (managers are too risk averse) or take too much risk at the expense of the shareholders The Agency Problem In Real Life Principal ---- Agent The Agency Problem (Managerial Agency Problem) Are CEOs Overpaid?...
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L_1_6 - Finance 365 Corporate Financial Analysis Lecture...

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