01_Oheads - Lecture Notes 1 What is Corporate Finance...

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1 Lecture Notes 1 What is Corporate Finance? Corporate finance is concerned with: * the capital budgeting decisions of a corporation – the types and proportions of real investments it chooses; * the capital structure of the corporation – the financial instru- ments that are used to finance investment; and * the decisions of investors and how they affect the rates of return on assets and therefore the cost of capital to corporations. What distinguishes a corporation as a business entity? • The corporation is a distinct legal entity. It can: * acquire and exchange property * enter into contracts, and * sue and be sued. • There are three key features of the corporation: i. The ownership is shared by many individuals – this allows in- vestors to hold diversified portfolios and reduce risks.
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2 ii. Shareholders in a corporation have limited liability – their per- sonal assets cannot be sequestered to pay off debts. iii. Ownership shares are transferable and traded on an open market – this in turn: * allows the corporation to have unlimited life; * allows for contestability in management; and * makes it easy to monitor managerial performance.
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