Fin 3080 Prof Xin Li Week 1 Notes
Fin 3080 Prof Xin Li Week 1 Notes FIN 3080C
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This 4 page Class Notes was uploaded by Brady Zuver on Thursday August 25, 2016. The Class Notes belongs to FIN 3080C at University of Cincinnati taught by Xin Li in Fall 2016. Since its upload, it has received 31 views. For similar materials see Business Finance in Finance at University of Cincinnati.
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Date Created: 08/25/16
Fin 3080C Prof Xi Lin Week 1 Notes Chapter 1 Introduction to Corporate Finance 1. Corporate Finance and the Financial Manager a. Corporate Finance addresses three Questions i. What Long term investments should a firm choose? ii. How should the Firm raise funds for selected investments? 1. Bonds (Creditors=Bondholders) iii. How should short term assets be managed and finance? b. Important Definitions and Financial Management Decisions i. Capital Budgeting 1. The process of planning and managing a firm’s long term investments ii. Capital Structure 1. The mixture of long term debt equity maintained by a firm iii. Working capital 1. A firm’s short term assets and liability c. Large corporations i. Owners (stockholders) generally not directly involved in making business decisions ii. Managers are hired to represent owner’s interests and make decisions on their behalf 2. Forms of Business Organization a. Sole Proprietorship i. Simplest form of business and least regulated form of organization ii. All business income is taxed as personal income and the owner has unlimited liability 1. Unlimited liability where the owner might have to give up personal assets as a form of payment to creditors iii. Owners are managers and the business is limited to the owner’s life iv. Difficult to transfer ownership v. Difficult to raise capital funds 1. Amount equity that can be raised is limited to the personal wealth of the owner. b. Partnership i. General Partnership 1. All partners have equal share in gains and losses, and all have unlimited liability in all debts ii. Limited partnership 1. One or more general partners will run the business and have unlimited liability 2. One or more limited partners who do not actively participate in the business a. Investors who provide funds but do not run business c. Corporation i. Business that is created as a distinct legal entity (the company is basically its own person) ii. Shares are easily exchanged and each share gets one vote iii. Limited Liability- Owned by shareholders, debt is spread among all owners and is limited (Stock prices cannot go below zero) iv. Double taxation v. Perpetual life 3. The Goal of Financial Management a. Possible goals i. Survive (continue to operate) ii. Avoid financial distress and bankruptcy (similar to surviving) iii. Beat the competition iv. Maximize sales or market share (grow the company) v. Minimize costs vi. Maximize profits vii. Maintain steady growth 4. The Agency Problem and Control of the Corporation a. Agency relationship i. Relationship between stockholders (the principal) and management (the agent) b. Agency Problem *** i. The possibility of conflict of interest between the stockholders and management of the firm 1. The goals of managers may be different than those of stockholders 2. Stockholders want maximization of stock prices 3. Utilities might not only be tied to money a. May be tied to convenience, level of difficulty, time to complete, etc. ii. How to avoid this issue 1. Compensation contracts a. Incentives to keep management and stockholders’ interests aligned b. Combines both interests together i. Ex: Options or bonuses for managers tied to stock prices 2. Market for corporate control a. Threat of hostile takeover may result in better management b. Proxy fights: contest to gain control of organization 3. Stakeholders a. Someone other than a stockholder or creditor who might have a claim to the cash flows on the firm i. Employees (stock options, profit sharing) ii. Customers iii. Suppliers iv. Government 5. Financial Markets and the Corporation a. Assets i. Financial Assets 1. Securities issued by firms, individuals and governments to raise finds a. Stocks, Bonds, Debts 2. Liabilities for the issuer, but assets to the buyer a. Companies have to pay stockholders (liability) b. Stockholders hold the stocks or bonds as an asset ii. Real assets 1. Physical Assets a. Land, Real Estate, Inventory b. Human capital b. Financial Markets i. Where Financial assets are traded 1. Primary Market** a. Original sale of securities by governments or corporations b. Corporation is the seller and the transactions raises money for the corporation c. Cash flows from Investors Issuer 2. Securities and Exchange Commission (SEC) a. Public offerings of debt and equity need be registered with the SEC 3. Initial Public Offering (IPO) ** a. Large first day returns (first offering to the public) i. 7-10% with some in the triple digits 4. Seasoned Equity Offerings (SEO) a. Firms sell additional shares directly to the public through another public offering 5. Secondary Market ** a. One owner or creditor selling to another i. Transferring ownership of corporate securities b. Securities bought and sold AFTER the original date c. Cash flows between investors i. Owners are NOT involved in secondary market ii. Definitions 1. Dealers a. Buy and sell for themselves at their own risk i. Car dealers buy cars to sell at their own risk 2. Brokers and Agents a. Match buyers and dealers, not own them i. Real estate agents 1. Do not usually buy properties, just connects buyers and sellers usually on commission iii. Two Kinds of Secondary Markets 1. Auction markets a. Physical location (such as wall street) b. Most of the buying and selling is done by the dealer c. Most large firms have their equity shares in organized auction markets
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