Corporate Finance in Modern Business
When contemplating all business decisions,
managers should ask:
Does this action create value for the
firm’s shareholders?
• By taking actions that generate benefits in
excess of costs, firms generate wealth for their
investors.
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Career Opportunities in Finance
Corporate • Budgeting, financial forecasting, cash
management, credit administration,
Finance investment analysis, fund procurement
Commercial • Consumer banking
Banking • Corporate banking
Investment • High income potential
Banking • Very competitive industry
Money • Opportunities in investment advisory firms,
mutual fund companies, pension funds,
Management investment arms of financial departments
• Advise on business practices and strategies
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Consulting of corporate clients
Corporate Finance Functions
External Financing
Capital Budgeting
Corporate
Finance Financial Management
Functions
Corporate Governance
Risk Management
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The External Financing Function
• Raising capital to support companies’ operations
and investment programs externally, from
– either shareholders (equity) or
– creditors (debt).
• Corporations can raise equity capital privately,
• or they may go public by conducting an initial
public offering (IPO) of stock.
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The Capital Budgeting Function
Capital Budgeting – selecting the
best projects in which to invest
the resources of the firm, based
on each project’s perceived risk
and expected return.
Select investments for which the marginal benefits exceed
the marginal costs.
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The Financial Management Function
• Managing firms’ internal cash flows,
• and its mix of debt and equity financing,
• to maximize the value of the debt and equity
claims on firms, and
• to ensure that companies can pay off their
obligations when they come due.
Involves obtaining seasonal financing, managing
inventories, paying suppliers, collecting from customers,
and investing surplus cash
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The Risk Management Function
• Managing firms’ exposures to all types of risk,
• both insurable (such as loss caused by fire or
flood) and uninsurable,
• in order to maintain optimum risk-return trade-
offs and thereby maximize shareholder value.
• Modern risk management focuses on adverse
interest rate movements, commodity price
changes, and currency value fluctuations.
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Debt & Equity: Two Flavors of Capital
• Borrowed money.
Debt
• The borrower is obliged to pay interest,
Capital
at a specified annual rate, on the full
amount borrowed, as well as to repay
the principal amount at the debt’s
maturity.
• An ownership interest usually in the
Equity form of common or preferred stock.
Capital
• Common stockholders receive returns
on their investments only after
creditors and preferred stockholders
are paid in full.
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The Corporate Financial Manager’s Goals
What should a financial manager try
to maximize?
• Maximize profit?
– Earnings reflect past performance, rather than
current or future performance.
– Ignores the timing of the profits.
– Ignores cash flows.
– Ignores risk.
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The Corporate Financial Manager’s Goals
What should a financial manager try
to maximize?
• Maximize shareholder wealth?
– As measured by the market price of the firm’s stock.
– A firm’s stock price reflects the timing, magnitude,
and risk of the cash flows that investors expect a firm
to generate over time.
– Shareholders are the residual claimants of a firm.
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The Corporate Financial Manager’s Goals
What should a financial manager try
to maximize?
• Focus on stakeholders?
– Many firms seek to preserve the interests of other
stakeholders, such as employees, customers, tax
authorities, and the communities where the firms
operate.
– Doing so provides long-term benefits to shareholders
and is in line with the primary goal of maximizing
shareholder wealth.
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The Scope of Corporate Finance
• Financial managers should seek to maximize
shareholders’ wealth.
• How?
By performing the five basic duties of corporate
finance: External financing, capital budgeting, financial
management, risk management, corporate governance.
• Select investments for which the marginal
benefits exceed the marginal costs.
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