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Corporate Finance Basics Explained

This document provides an overview of corporate finance concepts including the balance sheet, investment decisions, financing decisions, dividend decisions, and how they all tie back to firm value. It introduces the traditional accounting balance sheet framework and the financial view of assets and liabilities. It also briefly outlines that investment decisions involve determining the required rate of return and cash flow measurement, financing decisions involve choosing the right debt-to-equity mix, and dividend decisions involve determining how much cash flow to return to owners. The key point is that corporate finance decisions should aim to maximize firm value.

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Shankey Gupta
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469 views8 pages

Corporate Finance Basics Explained

This document provides an overview of corporate finance concepts including the balance sheet, investment decisions, financing decisions, dividend decisions, and how they all tie back to firm value. It introduces the traditional accounting balance sheet framework and the financial view of assets and liabilities. It also briefly outlines that investment decisions involve determining the required rate of return and cash flow measurement, financing decisions involve choosing the right debt-to-equity mix, and dividend decisions involve determining how much cash flow to return to owners. The key point is that corporate finance decisions should aim to maximize firm value.

Uploaded by

Shankey Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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An Introduction to Corporate Finance

Aswath Damodaran

Aswath Damodaran

The Traditional Accounting Balance Sheet

The Balance Sheet


Assets
Long Lived Real Assets Short-lived Assets Investments in securities & assets of other firms Assets which are not physical, like patents & trademarks Fixed Assets Current Assets Financial Investments Intangible Assets Current Liabilties Debt Other Liabilities Equity

Liabilities
Short-term liabilities of the firm Debt obligations of firm Other long-term obligations Equity investment in firm

Aswath Damodaran

The Financial View of the Firm

Assets
Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Assets in Place Debt

Liabilities
Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible

Growth Assets

Equity

Residual Claim on cash flows Significant Role in management Perpetual Lives

Aswath Damodaran

Aswath Damodaran

The Investment Decision


!

Every business has to decide where to allocate scarce resources. Put more prosaically, every business has to look at its available investment opportunities and decide whether to make the investment or not. In making this decision, rms have to grapple with two basic issues.
The rst is the rate of return that they need to make on an investment, given its risk, for it to be a good investment. The second is how to measure returns on investments, especially when the cashows on these investments are different from accounting earnings and vary over time.

Aswath Damodaran

The nancing decision


! !

There are two ways in which any business can raise nancing. It can use the owners funds (equity) or it can borrow money (debt). Every business has to consider whether the mix of debt and equity that it uses to fund investments is in fact the right one. The nancing decision examines whether the rms existing mix of debt and equity is the right one. Firms also have to pick from a variety of different nancing choices - short term versus long term debt, xed rate versus oating rate debt- and determine what type of nancing is best suited for them.

Aswath Damodaran

The dividend decision


!

After rms make investments with their chosen nancing mix, the investments generate cashows. When the cashows come in, rms will have to make decisions on how much of these cashows will be invested back into the business and how much returned to the owners of the business. In a publicly traded rm, cashows can be returned either as dividends or by buying back stock.

Aswath Damodaran

It all ties back to value


! !

Investment, nancing and dividend decisions made by businesses affect the values of these businesses. In valuation, we attempt to tie inputs into valuation models into basic corporate nance decisions. If the objective in corporate nance is to maximize rm value, good investment, nancing and dividend decisions should increase value. Bad decisions should decrease value.

Aswath Damodaran

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