1. Overview of Corporate Finance

1. Introduction

세 가지 주요 관심 분야

• Capital budgeting
  • What long-term investment should the firm take?
• Capital structure
  • Where will the firm get the long-term financing to pay for its investments?
  • What mixture of debt and equity should we use to fund our operations?
• Working captial management
  • How should the firm manage its everyday financial activities?
  • working capital = short-term assets
  • **How much** cash and inventory should we **keep on hand**?

영리 기업의 목적

make decisions that increase the value of the stock, or, more generally, increase the market value of the equity

- maximize the market value of the stock, not its book value.

What determines a stock price? = discounted sum of all future cash flows, so it reflects all consequence of any decision a company takes today (under efficient market)

 

!! EPS will not maximizing current shareholder wealth 

becuase EPS measure current profits; ignore the future completely

ex) reduce EPS by merger announcement

 

!! Book value of equity will not maximizing current shareholder wealth 

becuase it reflect mostly the past, not the future

 

기업의 조직형태

- 장점: easy than others to raising money and transferring ownership interests 

- 단점: double taxation

• Limited by an inability to raise cash for investment
  • Sole proprietorship: owned by one person
    • unlimited liability for debts
    • limited to the owner's life span
  • Partnership
    • general partnership
    • limited partnership
  • Double taxation
    • Corporation
      • stockholder control the corporation because they elect the directors
  • LLC: limited liability company
    • operate and be taxed like a partnership but retain limited liability for owners
    • ex: accounting firms, law firms

 

대기업에서의 주주와 경영진의 갈등

• agency problem: Who owns a corporation? - Conflict of interest 
• ***Agency cost***:
  • Indirect agency cost: if management decide to not invest, then the stockholders may lose a valuable opportunity.
  • Direct agency cost
    • Corporate expenditure that benefits management but costs the stockholders
    • Expense that arises from the need to monitor management actions
    • management may tend to overemphasize organizational survival to protect job security
• Do Manager Act in the stockholder's interests?
  • **Managerial Compensation**
    • = How closely are management goals aligned with stockholder goals?
    • Stock option: the more the stock is worth, the more valuable is this option
    • Incentive: better performer will tend to get promoted and higher salaries
    • two views on executive compensation
      • Executive pay is determined by the market. High pay is just a consequence of high demand for talent
      • But pay is determined by the board of directors, which may not work independently from the CEO
    • Possible solution is to rely on other governance machanisms
  • **Control of the firm**
    • = Can management be replaced if they do not pursue stockholder goals?
    • Proxy fight: stockholders action to replace existing management
      • proxy: authority to vote someone else's stock
    • Takeover: acquisition

 

Financial Market

• function as both primary(IPO) and secondary markets for corporate securities
• can be organized as either dealer or auction market
  • over-the-counter(OTC) markets: via borker-dealer

 

Industry Comparison

• How many compaines are in each industry?
• What are the total sales for each industry?
• Do the industries with the largest total sales have the most companies in the industry? What does this tell you about competition in the various industries?

 

2. Financial Statement, Taxes, and Cash Flow

•  Assets = Liabilities + Shareholder's equity
• health firm (+): current asset > current liabilities
• Income = Revenue - Expenses
  • EPS (earnings per share) = Net income / Total shares outstanding
  • Dividends per share = Total dividends / Total shares outstanding

 

1. The book values on an accounting balance sheet != market values

- GAAP: Generally Accepted Accounting Principles 

    - the common set of standards and procedures by which audited financial statements are prepared

 

2. Net income on the income statement != cash flow 

    - by depreciation, a noncash expense

 

3. Marginal tax rate != average tax rates

  - it is the marginal tax rate that is relevant for most financial decisions

 

4. The marginal tax rate paid by the corporations with the largest incomes is 35%

 

5. There is a cash flow identity much like the balance sheet identity

    - cash flow from assets == cash flow to creditors and stockholders