Corporate Finance and Financial Manager Notes

Introduction to Finance

  • Definition: Finance is the art and science of managing money.

  • Focus: Allocation of scarce resources over time.

  • Major types of finance:

    • Personal Finance

    • Corporate Finance

    • Government Finance

  • Financial decisions involve time dimensions and address risk and uncertainty.

  • Financial markets and institutions are critical for finance operations.

Financial Participants

  • Key roles in finance include:

    • Finance Manager: Responsible for investment, financing decisions, and managing cash flow.

    • Firm: Engages in investments and financing.

    • Financial Markets: Platforms for transactions.

    • Firm Stakeholders/Investors: Provide capital and expect returns.

The Finance Manager

Main Tasks

  1. Investment Decisions:

    • Weigh costs and benefits of investments.

    • Select potential projects or investments.

  2. Financing Decisions:

    • Estimate capital needs.

    • Determine optimal capital structure.

    • Identify sources of funding.

  3. Cash Flow Management:

    • Ensure sufficient liquidity.

    • Decide on reinvestment or distributions.

Types of Firms

  • 1. Sole Proprietorships:

    • Simple structure, single owner.

    • Unlimited personal liability; limited lifespan.

    • Ownership transfer is challenging.

  • 2. Partnerships:

    • Multiple owners sharing liabilities.

    • Can dissolve on partner withdrawal/death.

  • 3. Limited Liability Companies (LLCs) / Limited Partnerships:

    • Combine elements of partnerships and corporations.

    • General partners have full liability; limited partners have liability protection.

  • 4. Corporations:

    • Legally distinct from owners.

    • Shareholders have limited liability.

    • More complex and costly to establish.

Comparison of Business Entities

Feature

Sole Proprietorship

Partnership

Corporation

LLC

Legal Status

Not separate

Not separate

Separate

Separate

Owner Liability

Unlimited

Unlimited

Limited

Limited

Taxation

Pass-through

Pass-through

Double-taxed

Pass-through

Ease of Formation

Very easy

Easy

Requires filing

Requires filing

Formalities

Few

Few

Many

Few

Tax Implications

  • C Corporations:

    • Pay corporate taxes on profits.

    • Dividends taxed again at personal level (double taxation).

  • S Corporations:

    • Pass-through taxation; profits taxed at personal level.

Goals of the Firm

  • Primary Goal: Maximize shareholder value.

  • Additional Considerations:

    • Ethical considerations and stakeholder interests:

    • Employees, customers, suppliers, creditors, owners.

Broader Corporate Goals

  • Emergence of ESG (Environmental, Social, Governance) metrics that define company priorities beyond shareholder value.

Financial Manager's Role within Corporations

  • Stockholders elect the Board of Directors.

  • Management's main obligation is to maximize shareholder value while balancing potential agency problems (management's incentives vs corporation goals).

Financial Markets

Types of Markets

  • Primary Market: Where securities are created; firms sell new stocks.

  • Secondary Market: Where existing securities are traded among investors.

  • Important Exchanges:

    • NYSE: Largest auction market.

    • NASDAQ: Electronic dealer market with many tech companies.

Key Concepts

  • Bid-Ask Spread: Difference between buy (bid) and sell (ask) prices.

  • Liquidity: How quickly assets can be bought/sold without affecting their price.

Major Exchange Volumes

  • NYSE: $1781 billion

  • NASDAQ: $948 billion

Financial Institutions

  • Role: Serve as intermediaries, providing financial services; they move funds from savers to borrowers, manage risks, and help spread out financial resources over time.

Types of Financial Institutions

  • Commercial banks, investment banks, credit unions.

  • Insurance companies, mutual funds, hedge funds, private equity funds, etc.