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ActSc371_Lecture 1_Chapter 1 (Ross)

ActSc371_Lecture 1_Chapter 1 (Ross) - ActSc 371 Corporate...

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9/11/2011 1 Lecture 1 Sections 1.1 and 1.2 from Chapter 1: Introduction to Corporate Finance (Corporate Finance by Ross et al.) ActSc371 –Corporate Finance 1 Instructor: Dr. LysaPorth 1 Introduction Introduction to Corporate Finance Air Canada Case Study AC long been nations largest airline. Entered bankruptcy protection in 2003 (owed $12 billion to creditors). April 2004, company had $900 million in available cash, despite loss of $1.9 billion the previous year. AC unions agreed to take $850 million in job and pay cuts to alleviate CF pressure in 2004. In 2006, restructuring was said to be successful with net income of $236 million and special distribution of $2 billion in cash and securities to shareholders. July 2009, $1 billion in financing to avoid 2 nd bankruptcy in 6 years. 2010, ACE’s stock price was trading at $5.03 per share. 2 Introduction Introduction to Corporate Finance Cont’d This case study on AC demonstrates some of the basic concerns of corporate finance: 1. What long-term investment strategy should a company take on? 2. How can cash be raised? 3. How much short-term cash flow does a company need to pay its bills? 3 Chapter 1: Introduction to Corporate Finance 4 The Balance-Sheet Model of the Firm Current Assets (have short lives, i.e. inventory) Fixed Assets (will last a long time, i.e. a building) 1. Tangible (machinery) 2. Intangible (patents) Total Value of Assets: Shareholders’ Equity (difference between the value of the assets and the debt of the firm, a residual claim on the firm’s assets) Current Liabilities (short term debt, loans must be repaid within the year) Long-Term Debt (debt that doesn’t have to be repaid within the year) Total Firm Value to Investors (Financing):
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9/11/2011 2 Chapter 1: Introduction to Corporate Finance 5 The Capital BudgetingDecision Current Assets (have short lives, i.e. inventory) Fixed Assets (will last a long time, i.e. a building) 1. Tangible (machinery) 2. Intangible (patents) Total Value of Assets: Shareholders’ Equity (difference between the value of the assets and the debt of the firm, a residual claim on the firm’s assets) Current Liabilities (short term debt, loans must be repaid within the year) Long-Term Debt (debt that doesn’t have to be repaid within the year) Total Firm Value to Investors (Financing): What long- term investments should the firm engage in? Chapter 1: Introduction to Corporate Finance 6 The Net Working Capital Investment Decision Current Assets (have short lives, i.e.
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