Chapter 1 : Introduction to Corporate Finance

Corporate Finance

Financial decision-making of corporations. The objective is to maximize the current market value of the firm’s equity, which maximizes the SHs wealth

Firms

Combine labor, raw-materials and capital to produce goods and services

Limited Liability

Owners are not personally responsible for the firm’s debt beyond investment

Unlimited Liability

Owners can be personally responsible for the firm’s debt and obligations

Sole proprietorship

• One owner

• Unlimited liability

• Business income taxed as personal

General partnership

• 2+ partners

• Unlimited liability

• They manage the business

Limited Partnership

• General partners: manage + unlimited liability

• Limited partners: provide capital + limited liability

Limited liability company / Limited company

• Owners: limited liability

• Ownership interests are not freely transferable

• Public share offering are not permitted

Corporation

• Owned by SHs

• Limited liability

• shares are freely transferable

• Ownership and management are separated

Listed companies

• Shares are traded on a securities exchange

• Shares are available to public investors

• Subject to greater disclosure and transparency requirements

• Market prices provide an observable indication of equity value

Unlisted Companies

• Shares are not listed on a securities exchange

• Disclosure requirements are more limited

• No directly observable exchange-traded share price exists

• Shares are valued through negotiation or valuation methods

Market Value of Equity

Current value of SHs’ ownership

Market Value of Debt

Current market value of the firm’s debt

IPO

Initial Public Offering : A company that offers shares to the public for the 1st time

SEO

Seasoned Equity Offering : An already public company issued additional shares

Financial leverage

The use of debt in a firm’s capital structure

Capital structure

The combination of debt and equity used to finance a firm

Positive NPV

A project is expected to create value

Debt Financing

Raising capital by borrowing or issuing bonds

Equity financing

Raising capital by issuing shares

Share repurchase

A company buys back its own shares

Retained cash

Cash kept by the company for future needs or investments rather than distributed to SHs