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 References
• Fundamentals of Corporate Finance, Brealey et al.,
McGraw Hill, 5th edition, USA, 2007.
• Foundation of Financial Management, Block & Hirt,
McGraw Hill, 12th edition,USA, 2008.
• Other relevant materials.
 Chapter 1: Introduction to
Corporate Finance
• Main Contents:
1. Investment and Financing Decision.
2. Introduction to Corporation.
3. Goals of a Corporation
4. Financial Manager in large Corporation
5. Importance of Financial Markets and
Institutions.
6. Flow of savings to Corporations.
7. Functions of Financial Markets and
Intermediaries.
8. Cost of Capital.
 I. Investment and Financing
Decision
Buy more facilities ? What kind ?
Investment decision Open new market ?
Invest in new technique ?

Funds …
Financial Manager
… from bank loan ?
… from papa or mama ?
…from venture capitalists ?
Financing decision
…from stock market ?

HOW MUCH ?

Role of investment decision and Financing decision:

Ensuring an invested project whose worth is more than its cost
I. Investment and Financing
Decision (cont’d)
 I. Investment and Financing
Decision (cont’d)

What will financial manager do next after making financial decision ?

… raising funds for investment and operation

…from Long-Term financing

•Investors (investing in debt or equity)
•Bank loans
1 year

…from Short-Term financing

•How to invest spare cash for brief period (short term investment decision)
•How to raise cash for short term (short term financing decision)
 I. Investment and Financing
Decision (cont’d)
Flow of cash between investors and the firm’s operation

1 Cash raised by selling financial assets to investor

2 Cash invested in the firm’s operations

3 Cash generated in the firm’s operations

4a Cash reinvested

4b Cash returned to investor

I. Investment and Financing
Decision (cont’d)
II. Introduction to Corporation

CORPORATION

…an organized business

…a separate legal entity
…owned by stockholders

MINICASE:
When Enron and Worldcom failed in 2002, two of the
largest bankcrupcies ever, Peter was the shareholder
of Enron. He would:

1. Reserve all his investment worth on Enron.

2. Loose all his investment worth on Enron.
3. Loose all his invesment worth on Enron as well as
his other private properties.
4. All of these are possible to occur.
II. Introduction to Corporation
(cont’d)

Other forms of Business Organization

Unlimited liability

Limited liability
Partnership

Sole Proprietorship

Business income tax

Limited Partnership
Personal income tax
II. Introduction to Corporation
(cont’d)
III. Goals of the Corporation

Maximizing market value of shareholders’ investment in the firm

Ethics and management objectives

III. Goals of the Corporation (cont’d)
Menace for
Corporation
Agency Problem!!!

Manager

own interests Maximizing value of shareholder

IV. Financial Manager in large
corporation
V. Importance of Financial
Markets and Institutions

All Corporations face…

…investment decisions
…financing decisions

FINANCIAL ENVIRONMENT

Financial Markets

Financial Institutions
 V. Importance of Financial
Markets and Institutions (cont’d)

Financial Markets

Stock market … where equity securities are issued and traded

Primary market …where new equity securities are sold

Secondary market …where previously issued equity

securities are traded
 V. Importance of Financial
Markets and Institutions (cont’d)

Financial Markets (cont’d)

Fixed-income market

…market for short-term financing

Capital market

…market for long-term financing

Money market

… where debt securities are issued and traded

 V. Importance of Financial
Markets and Institutions (cont’d)

Financial Institutions

Commercial Bank

…advice and assist companies in raising funds

…advice on takeovers, A&M

…underwrite stock offering
Investment Bank
…invest in the start-ups

…advice investment or manage porfolio on FX derivatives

 V. Importance of Financial
Markets and Institutions (cont’d)

Financial Institutions (cont’d)

Insurance company

…specializing in only providing long-term financing

…investing in corporate stocks and bonds

 V. Importance of Financial
Markets and Institutions (cont’d)

Financial intermediaries

an organization financing
raise

Investor
 V. Importance of Financial
Markets and Institutions (cont’d)

Financial intermediaries (cont’d)

Mutual fund An investment company Pooling the savings of investors

Invest in a portfolio of securities

Hedge fund A whole sale (*) investment business

Follow high-risk investment

Pension fund Extracting from employee’s monthly paycheck

Investing in mutual funds

Finally withdrawn as retirement

 VI. Flow of Savings to
Corporation

Flow of savings to investment in a closely held corporation

 VI. Flow of Savings to
Corporation (cont’d)

Flow of savings to investment in a large, public corporation

 VI. Flow of Savings to
Corporation (cont’d)

Comments:

• Applied for a newly established corporations.

• Applied for a large, profitable, public firms

• Cash retained and reinvested is cash saved and invested on behalf of the
firm’s shareholders
VII. Functions of Financial
Markets and Intermediaries

• Transporting cash across time

• Risk transfer and diversification

• Liquidity

• The payment mechanism

• Information providing
 VIII. Cost of Capital

Cost of
Capital

Financial Manager

• The cost of taking funds from financial markets

• Minimum acceptable rate of return on capital investment

 VIII. Cost of Capital (cont’d)

Rate (%)

15%
• Cost of capital • Investment project’s rate of return

• Investment project’s rate of return 12% • Cost of capital

REFUSE the project 0% ACCEPT the project

 VIII. Cost of Capital (cont’d)

Cost of Capital for corporate reinvestment is set by the rate of return

on investment opportunity in financial markets
Thank you for your attention !
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