Intro

Thursday, January 4, 2018 1:37 PM

2018-01-09

• Bloomberg course code: 47LGSW8J0D

○ Fixed income
○ Equities

1.1 Investment and Financial Decisions

• The financial manager needs to determine:
○ What capital investment projects to invest in and how much to spend on
each project
§ This is called the capital budgeting decision or the investment
decision
○ How to raise the money the firm needs to pay for those assets
§ This is called the financing decision

The Investment Decision

• The financial manager needs to place a value on the uncertain future cash flow
(benefits) generated from the investment projects. In order to achieve this,
he/she needs to account for the:
○ Amounts of benefits
○ Timing of benefits
○ The risks associated with future benefits produced by the asset
• If the project's value is greater than its cost, it is an attractive project

The Financing Decision

• In order to raise money for the investments and operations of the firm, the
financial manager can use
○ Internally generated funds
○ External financing sources
• Two broad categories of external financing
○ Debt financing
○ Equity financing
• The choice between these two external sources is called the capital structure
decision
 • Two broad categories of external financing
○ Debt financing
○ Equity financing
• The choice between these two external sources is called the capital structure
decision

• Real assets
○ Assets used to produce goods and services
• Financial assets
○ Financial claims to the income generated by the firm's real assets

1.2 What is a Corporation?

• A business (separate legal entity) owned by shareholders who are not
personally liable for the business's liabilities (limited liability)
• Shareholders are owners, but the corporations are run/led by the CEO
• Although the separation of ownership and control adds flexibility to the
operation and gives permanence to the corporation, it also creates agency
problems
• Corporations are the dominant form of business in the modern day
• Corporation can sue or be sued
• Shareholders can sell shared
• Has a board of directors elected by shareholders
• Can be costly in both time and money
• Must abide by the rules of stock exchanges, accounting standards and securities
la
• Taxed twice - on the company profits and also in the hands of shareholders
• Must share info w the public

1.4 Who is the Financial Manager?

• Anyone responsible for a significant corporate investment or financing decision
• Under the CFO there are usually two broad categories of job descriptions
○ The treasurer is responsible for cash management, raising new capital,
and maintaining relationsjips with banks and other investors
○ The controller is responsible for preparing financial statements, managing
 • Anyone responsible for a significant corporate investment or financing decision
• Under the CFO there are usually two broad categories of job descriptions
○ The treasurer is responsible for cash management, raising new capital,
and maintaining relationsjips with banks and other investors
○ The controller is responsible for preparing financial statements, managing
internal accounting and taxes

1.3 Other Forms of Business Organization

• Sole proprietorship
• Partnership
• Hybrid forms (LLP, LLC, PC, ETC)

Properties of Different Forms of Business

1.5 Goals of the Corporation

• Shareholders want managers to maximize market value of the corporation
• Increasing market value increases shareholder wealth
• Maximizing profit does not necessarily increase overall market value
• The objective should be to maximize the current share price
• Using unethical means to increase share price will only lead to failure

Ethics and Management Objectives

• Crime does not pay
○ WorldCom, enron, Parmalat
• The ethics of maximizing value
○ Unwritten rules of behaviour
○ Reputation
 • Crime does not pay
○ WorldCom, enron, Parmalat
• The ethics of maximizing value
○ Unwritten rules of behaviour
○ Reputation

Do Managers Really Maximize Firm Value

• In most large public companies the managers are not the owners and they may
not always act in the best interests of the owners
• Managers are hired as agents of the owners
• When the personal goals of these agents create conflict in their roles in the
corporation, they create agency problems
○ Managers may overindulge in unnecessary expenses
○ They may shy away from attractive but risky projects
○ They may engage in empire building
• Managers must consider the interests of all stakeholders

The Agency Problem

• Agency problems can be reduced in several ways
○ Compensation plans
○ Employee stock options
• Board of directors
• Threat of takeovers
• Specialist monitoring
• Shareholder pressure

Summary
• Investment decisions - how much to invest and what assets to acquire
• Financing decisions - how to raise necessary cash
• Real assets - securities sold by the firm to raise money
• What is a corporation?
○ Characteristics - separate legal entity
○ Advantages and disadvantages - limited liability, double taxation
• Other forms of business organization
○ Sole proprietorships
○ Partnerships
○ Hybrids
• Who are the major financial managers?
○ CFOs - oversees treasurer and controller
• Goals of the corporation
○ Maximize market value - maximizing value maximizes the wealth of the
firm's owners, its shareholders
• Ethics and management objectives
• Who are the major financial managers?
○ CFOs - oversees treasurer and controller
• Goals of the corporation
○ Maximize market value - maximizing value maximizes the wealth of the
firm's owners, its shareholders
• Ethics and management objectives
○ Maximum value starts with products and services that satisfy customers
○ Conflicts of interest, called agency problems, may arise in large firms
between the owners, stakeholders, and managers
○ Compensation plans, regulation, monitoring, board of directors, and
threats of takeovers can help reduce the problem