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This 2 page Class Notes was uploaded by Karen Ooi on Thursday January 14, 2016. The Class Notes belongs to Fin 301 at Iowa State University taught by Dr. Wang in Summer 2015. Since its upload, it has received 37 views. For similar materials see Intro to Finance in Finance at Iowa State University.
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Date Created: 01/14/16
Chapter 1: Corporate Finance and Financial Management Financial Management Decision • Capital Budgeting • Capital Structure • Working Capital Management Capital Budgeting - Long term investment decisions e.g: - Should GM add a new machine to its assembly line? - Should Kohl’s open a store in Ames? - Should Rfizer start R&D in cancer treatment? - Should Microsoft acquire Motorola? Ø Valuation Input: ~ Initial investments ~ Future cash flows (size, timing, risk) Capital Structure - Long term financing decisions Ø Main financing sources: ~ Equity ~Long-term debt Ø Financing channels: ~ Public offering vs. Private placement ~ Bank loan vs. Corporate bond Working Capital Management - Daily financial activities management - Short-term assets and short-term liabilities e.g: - How much inventory to keep in the warehouse? - What kind of credit policy offered to clients? - How much cash the company needs to keep in order maintaining a smooth operation? - Can we bargain for a better credit policy from the suppliers? Ø Goal - Balance capital efficiency and continuous operation Goal of Financial Management Ultimate goal: maximize owners’ wealth or firm value Plausible Measures - Maximize sales or revenue? - Maximize current profits? - Minimize costs? - Total asset/ total capital in the accounting book? Firm value is intrinsic and forward-looking - Any proxies? (stock price, or market value of a company) Forms of Business Organization Sole Proprietor Partnership (general & Corporation limited) Owned by one person and Owned and managed by Separation of ownership managed by the same more than one person and management person Unlimited liability Unlimited liability Limited liability Taxed only once Taxed only once Double taxation Very limited equity capital More equity available, but Easy to raise large amount still limited of equity capital (primary market) Difficult to transfer Difficult to transfer Easy to transfer ownership ownership ownership (secondary market) The Agency Problem Ø Agency Relationship - Principal hires an agent to represent his/her interests - Stockholders (principle) hire managers (agents) to run the company Ø Agency Problem - Conflict of interest between principal and agent Ø Agency Costs - Management’s decision may not be the best interest of shareholders - Monitoring costs (e.g. hiring outside accountant to audit)
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