Week 1_Preliminary Concepts

Week 1_Preliminary Concepts - Week 1 Introduction to...

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Unformatted text preview: Week 1: Introduction to Corporate Finance 1 Table of Contents 1. Corporate objective and corporate financial decisions 2. F inancial assets and capital markets 3. The flow of funds 4. Measuring and maximising wealth of corporate owners 5. Asset valuation 6. Fisher’s Separation Theorem 7. Rate of return on securities 2 1. Corporate objective and corporate financial decisions • The corporate objective can be stated in two different, but equivalent, ways: “ Maximise the value of the company ” OR “ Maximise shareholder wealth ” • This means using scarce resources (capital and labour) in the most efficient manner possible – Minimum input lead to maximum output 3 Corporate objective • However, there might be conflicts – Maximization of value of firm A may lead to sub ‐ optimal resource allocation for the economy • E.g. Woolworths and Coles vs. corner stores • E.g. Goldman Sachs vs. Investors – This may be due to presence of • distortions and perverse incentives – Mismatch between corporate (share holder) incentives and the incentives of other stake holders • Lack of effective regulation 4 Corporate financial decisions • Corporate financial decisions faced by financial managers are: – The investment decision – The financing decision – The dividend decision 5 Corporate financial decisions 6 Assets • Real • Financial • Non-Tangible Equity Capital • Preferential shares • Ordinary shares Liabilities • Bank loans • Debt Securities Investment Decisions • The way in which funds that have been raised are used in productive activities • The objective is to generate a return to investors • This is dealt with under the topic of “capital budgeting” or “project evaluation” (Chapter 4) Dividend Decisions • Relates to the form in which returns are passed on to equity holders • This is dealt with under ‘dividend policy’ (Chapter 10) Financing Decisions • The mix of funding obtained from capital markets • The proportional holdings of equity and debt • This is addressed via analysis of ‘capital structure’ (Chapter 11) Table of Contents 1. Corporate objective and corporate financial decisions 2. F inancial assets and capital markets 3. The flow of funds 4. Measuring and maximising wealth of corporate owners 5. Asset valuation 6. Fisher’s Separation Theorem 7. Rate of return on securities 7 2. F inancial assets and capital markets ‘Assets’ can be classified as Real assets – Assets that can be put to productive use to generate a return – Subject of capital budgeting (Chapters 4 and 5) – e.g. machinery and equipment – This defines what the firm is 8 F inancial assets Financial assets – Assets that represent a claim to a series of cash flows against an economic unit • Shares – A claim against a company – Cash flows = dividends and sale price • Bonds – A claim against the bond issuer – Cash flows = interest and principal • Bank accounts – A claim against a bank – Cash flows = interest and principal 9 F...
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Week 1_Preliminary Concepts - Week 1 Introduction to...

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