Corporate Finance: Investment, Capital Structure, and Market Dynamics

Capital budgeting

Chooses which investments are beneficial to take on, ex: new factory, software upgrade

Capital structure

How the firm will pay for the investments Ex: bonds, borrow from the bank or stock

Working capital management

Short-term decision based on managing everyday financial activities for the firm Ex: inventory

Sole proprietorship

One owner

Pros of sole proprietorship

Easy to start, owner takes all profit, taxed once

Cons of sole proprietorship

Difficult to sell, unlimited liability (owner responsible for all liability)

Partnership

2+ owners

Corporation

Legal entity separate from owners, owners invest in the public

Pros of corporation

Limited liability, easy to sell shares/buy, easy to raise capital

Cons of corporation

Double taxation, ownership and management is separate

Goal of financial management

Maximize the current value per share of existing stock

examples of financial management

Maximize profits (S/T or L/T), Maximize profits - minimize costs Avoid bankruptcy, Avoid bad investments

Agency Problems

Firm managers such as CEOs, CFOs, executives and other managers are agents of the owners

Conflicts of interest

Is the manager acting in the best interest of the owners, or their own? (ex: corporate jet)

How to mitigate conflicts of interest

Managerial compensation through stock price, stocks, bonuses, and stock options, control of firm through takeovers

Misbehaving management examples

Sarbanes-Oxley Act of 2002

Sarbanes-Oxley Act of 2002

Management of corporation must attest to accuracy of financial statements or be held personally /criminally liable

Cash flows to the firm

Use capital to invest in projects, generate revenue, and minimize expenses to make profits / net cash flow

Primary markets

Company raises capital from public, available to public and private

Examples of primary markets

IPO (initial public offering), SEO (seasonal equity offering)

Secondary market

Previously issued stock and bonds trade b/t investors issuing company not involved in transactions

Stocks issued by larger firms

Usually trade on organized exchanges such as NYSE, Nasdaq