Topic 2 - Introduction to Corporate Finance - Slide Deck
Page 2: Learning Objectives
Understand what corporate finance is
Examine the business structures of corporations
Understand the role of the finance manager
Explore key concepts in corporate finance
Page 3: Key Concepts in Corporate Finance
Agency Relationships
Opportunity Cost of Capital
Maximizing Shareholder Value
Balance Sheet considerations
Tax System
Efficient Market Hypothesis
Page 4: What is Corporate Finance?
Involves corporate financial decision-making
Any decision affecting a business's finance
Assessing investments/projects
Dividend decisions
Capital structure decisions
Functional decisions, e.g., mergers & acquisitions
Page 5: Corporate Finance in the News
Apple sells $5.5 billion in bonds
Noble Energy shareholders likely to approve $4.2 billion Chevron deal
Borrowing costs are low; Apple Inc. and others are selling bonds with record low yields
Page 6: Main Business Organization Types
Sole Proprietorships
Easy to set up, suited for small businesses
Unlimited liability for owner
Partnerships
Shared obligations/profits
Unlimited liability risks
Corporations
Separate legal entity from owners
Limited liability for shareholders
Board of Directors elects managers
Focus on maximization of shareholder value
Page 7: What Does the Financial Manager Do?
Financing Decisions
Determine which instruments to use
Find optimal mix
Valuation & Investment Decisions
Calculate cash flows
Determine appropriate return rate
Dividend Decisions
How much to distribute and in what form?
Risk Management and Hedging
Identify which risks to hedge
Determine suitable instruments
Page 8: Real and Financial Assets
Real Assets (Capital Budgeting)
Generate cash flows (e.g., goods/services)
Can be tangible (buildings) or intangible (brands)
Financial Assets (Capital Structure)
Loans and shares are claims to cash from real assets
Explore optimal long-term financing mix
Short-term Real and Financial Assets
Management of short-term cash flows (payables and receivables)
Page 9: The Financial Manager
Acts as intermediary between:
Cash flows from real assets and financial markets
Equity holders receiving dividends/capital gains and debt holders expecting interest
Objective: Maximize Shareholder Value → Maximize Economic Value Added
Page 10: The Financial Manager as an Intermediary
Relationship Overview:
Cash raised from investors
Cash invested in the firm
Cash generated from operations
Cash reinvested or returned to investors
Page 11: Financial Markets
Revolving around money ($, €, £)
Types:
Primary market
Secondary market
Over the counter (OTC) market
Page 12: Financial Intermediaries - Financial Institutions
Banks: Raise funds from depositors to lend
Insurance Companies: Fund long-term loans and hold corporate bonds
Mutual Funds, Hedge Funds, Private Equity: Various investment strategies
Page 13: Key Concepts in Corporate Finance
Reinforcement of previously mentioned concepts
Page 14: Agency Relationships
Exists when one party (principal) hires another (agent) to perform a service
Potential conflicts of interest between shareholders (principals) and management (agents)
Managers' goals may not align with shareholders' goal of maximizing investment value
Page 15: Potential for Agency Conflict
Managers may choose not to work hard or take misaligned risks
Their focus might not prioritize shareholder wealth maximization
Page 16: Means to Reduce Agency Conflict
Appropriate Compensation Structure (e.g., stock options)
Monitoring Management Actions (auditors, rating agencies)
External Governance (e.g., independent board members)
Takeover Threats and Shareholder Activism
Page 17: Opportunity Cost of Capital
Definition: Rate of return foregone on the best alternative investment
Example: Investment decision scenario illustrating opportunity cost evaluation
Page 18: The (Accounting) Balance Sheet (1/2)
Snapshot of assets and liabilities at a moment in time
Shareholders’ equity calculation
Importance of current vs. long-term assets and liabilities
Page 19: The (Accounting) Balance Sheet (2/2)
Breakdown of asset types:
Current and fixed assets
Current and long-term liabilities
Shareholders’ equity
Page 20: Market Value vs. Book Value (1/2)
Book values reflect historical values; may differ significantly from market values
Market values can indicate current risk levels and investor outlook
Page 21: Market Value vs. Book Value (2/2)
Example illustrating disparity between book and market value in the balance sheet
Page 22: What is a Company Worth?
Considerations:
Share price
Total Debt and Equity value
Page 23: Consider the Purchase of a Property
Example of how debt and equity contribute to firm valuation
Value of the Firm = Equity + Debt
Page 24: Tax System – Implications for Corporate Finance
Taxes influence corporate financial decisions, including the advantage of debt issuance
Page 25: Taxes and Cash Flows to Stakeholders (1/2)
Comparison of two firms' cash flows and tax implications
Page 26: Taxes and Cash Flows to Stakeholders (2/2)
Continues comparison and illustrates the value perspective of stakeholders
Page 27: Efficient Market Hypothesis (1/2)
Definition: Market prices reflect all available information; unpredictable price changes
Forms of efficiency explained: weak, semi-strong, strong
Page 28: Efficient Market Hypothesis (2/2)
Real-world example of stock price fluctuations driven by market efficiency
Page 29: Questions
Contact Information: siqi.liu@ucd.ie
UCD Dublin Michael Smurfit Graduate Business School