Introduction to Corporate FinanceFINC 3610 ‐ Yost3Introduction to Corporate Finance4Basic Areas of Finance• Corporate Finance• Investments• Financial Institutions• International Finance5What is Corporate Finance?Corporate finance focuses on 3 questions:1. What should we invest in?2. How do we finance those investments?3. How do we manage the day‐to‐day operations of the firm?Introduction to Corporate FinanceFINC 3610 ‐ Yost6The Balance Sheet Model of the Firm• Balance Sheet Identity:7Capital Budgeting• What is capital budgeting?– The process of ____________________ the firm’s ______________________.• How do we do it?1. Estimate cash flows.2. Estimate the cost of those cash flows.3. Discount the cash flows.8Capital Structure• What is capital structure?– The _____________________ describing how the firm is financed.• Does capital structure matter?• How do taxes affect this decision?• How does this relate to the goal of the financial manager?70% Debt30% EquityIntroduction to Corporate FinanceFINC 3610 ‐ Yost9Short‐Term Cash Flow Management• What does short‐term cash flow management entail?– Net Working Capital = – Cash Management– Credit Management10Financial MarketsFirmsInvestorsSecondaryMarketmoneysecuritiesSueBobStocks and BondsMoneyPrimary Market11Debt and Equity as Contingent Claims• Debt is _______________________.• Equity ________________________.A firm has $100 in debt.If the value of the firm’s assets is…• $75, debtholders get _____ and stockholders get _____.• $100, debtholders get _____ and stockholders get _____.• $200, debtholders get _____ and stockholders get _____.• $1,000,000, debtholders get _____ and stockholders get ________.Introduction to Corporate FinanceFINC 3610 ‐ Yost12Sole Proprietorship• Pros– Easy startup.– Taxed as personal income.• Cons– _____________________.– Life limited to that of owner.– Equity limited to owner’s wealth.– Difficulty in transferring ownership.13Partnership• General vs. Limited Partners• Pros– Easy startup.– Taxed as personal income.• Cons– __________________________.– Life limited to that of the owners.– Equity limited to owners’ combined wealth.– Difficulty in transferring ownership.14Corporation• Corporation: A business created as a distinct legal entity composed of one or more individuals or entities.• Separation of Ownership and Control– Shareholders– Directors– ManagersIntroduction to Corporate FinanceFINC 3610 ‐ Yost15Corporation• Pros– ___________________.– Easy transfer of ownership.– Unlimited life.– Equity is not limited.• Cons– Difficult to startup.– _______________________.16The Goal of the FirmWhat does that mean?17Agency Conflicts• What is a principal‐agent relationship?• Agency Problem/Conflict: The possibility of conflict of interest between the stockholders (the principal) and management (the agent) of a firm.Introduction to Corporate FinanceFINC 3610 ‐ Yost18Agency Conflicts• Agency Costs: The costs of the conflict of interest between stockholders and management.– Direct agency costs:••– Indirect agency costs•19How do we control agency conflicts?• Managerial Compensation• Control of the Firm––20Suggested Problems• Concepts Review and Critical Thinking Questions– 3, 6, 7, and