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Chapter One
Introduction Corporate
to
Finance
Ross Westerfield Jaffe
Corporate Finance
Sixth Edition
Prepared by
Gady Jacoby
University of Manitoba
and
Sebouh Aintablian
American University of
Beirut
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Chapter Outline
1.1 What is Corporate Finance?
1-2
1-3
Current Assets
Current
Liabilities
Long-Term
Debt
Fixed Assets
1 Tangible
2 Intangible
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Shareholders
Equity
1-4
Current Assets
Long-Term
Debt
Fixed Assets
1 Tangible
2 Intangible
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What longterm
investments
should the
firm engage
in?
Shareholders
Equity
1-5
Current Assets
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Current
Liabilities
Long-Term
Debt
Shareholders
Equity
1-6
Current Assets
Fixed Assets
1 Tangible
2 Intangible
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Current
Liabilities
Net
Working
Capital
Long-Term
Debt
Shareholders
Equity
1-7
Capital Structure
The value of the firm can be
thought of as a pie.
The goal of the manager is
to increase the size of the
pie.
The Capital Structure
decision can be viewed as
how best to slice up the pie.
70%50%30%
25%
DebtDebt
Equity
75%
50%
Equity
If how you slice the pie affects the size of the pie,
then the capital structure decision matters.
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Treasurer
Controller
Cash Manager
Credit Manager
Tax Manager
Cost Accounting
Capital Expenditures
Financial Planning
Financial Accounting
Data Processing
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Invests
in assets
(B)
Retained
cash flows (D)
Short-term debt
Cash flow
from firm (C)
Dividends and
debt payments (F)
Taxes (E)
Current assets
Fixed assets
Financial
markets
Government
Long-term debt
Equity shares
1-11
1-12
Payoff to
shareholders
$F
Value of the firm (X)
$F
Value of the firm (X)
$F
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Min[$F,$X] = $F.
The sum of these is = $X
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The Corporation
Advantages and Disadvantages
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Partnership
Liquidity
Subject to substantial
restrictions.
Voting Rights
Taxation
Partnership income is
taxable.
Reinvestment
Broad latitude
Liability
Limited liability
Continuity
Perpetual life
Limited life
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Managerial Goals
Managerial goals may be different from
shareholder goals
Expensive perquisites
Survival
Independence
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Board of Directors
Shareholders
Assets
Debt
Debtholders
Management
Equity
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1-22
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Deposits
Financial
intermediaries
Loans
Funds
demanders
Direct finance
Funds
suppliers
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Financial
intermediaries
Funds
demanders
1-24
Financial Markets
Money versus Capital Markets
Money Markets
For short-term debt instruments
Capital Markets
For long-term debt and equity
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Financial Markets
Primary versus Secondary Markets
Primary Market
When a corporation issues securities, cash flows
from investors to the firm.
Usually an underwriter is involved
Secondary Markets
Involve the sale of used securities from one
investor to another.
Securities may be exchange traded or trade overthe-counter in a dealer market.
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Financial Markets
Firms
Stocks and
Bonds
Money
Investors
securities
Bob
Sue
money
Primary Market
Secondary
Market
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Overview
II.
III. Risk
IV. Capital Structure and Dividend Policy
V.
Long-Term Financing
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