Corporate FinanceCorporate Finance

Lecture 1Lecture 1

TopicsTopics

Change of schedule:Change of schedule:– FridaysFridays

from 18:30 – 19:50 to 11:00 – 12:20from 18:30 – 19:50 to 11:00 – 12:20 Practical information about this Practical information about this

coursecourse The firm and the financial The firm and the financial

managersmanagers

About the CourseAbout the Course

Objective: to introduce basic principles of Objective: to introduce basic principles of finance and practical tools for financial finance and practical tools for financial decisions. decisions.

Text book: Corporate Finance, Ross, Text book: Corporate Finance, Ross, Westerfield and Jaffe, 7th editionWesterfield and Jaffe, 7th edition

Syllabus and notes online:Syllabus and notes online:

http://docentes.fe.unl.pt/~qdai/teaching/http://docentes.fe.unl.pt/~qdai/teaching/master/corpfin2009.htmlmaster/corpfin2009.html

Office hour: Tuesday 16:00 to 17:00, Room Office hour: Tuesday 16:00 to 17:00, Room 352 352

Email: Email: qinglei.dai@fe.unl.ptqinglei.dai@fe.unl.pt

EvaluationEvaluation

Class participation (10%)Class participation (10%)

Exercises and Case studies (40%)Exercises and Case studies (40%)– 2 cases and three online exercises2 cases and three online exercises– Moodle password: financeMoodle password: finance

Case study group:Case study group:– 3-4 students per group. 3-4 students per group. – The groups have to be registered by April 14 with The groups have to be registered by April 14 with

TA. Anyone who fails to register has to do the case TA. Anyone who fails to register has to do the case study study ALONE.ALONE.

Final exam (50%)Final exam (50%)– May 19May 19

The firm The firm and the financial and the financial managersmanagers The firmThe firm What do we learn from this What do we learn from this

course? course? – The balance sheet model of The balance sheet model of

corporate financecorporate finance The role of a financial managerThe role of a financial manager

– What is a financial managerWhat is a financial manager– The roleThe role

Organization ChartOrganization Chart

Chairman of the Board and Chief Executive Officer (CEO)

Board of Directors

President and Chief Operating Officer (COO)

Vice President and Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager

Capital Expenditures

Credit Manager

Financial Planning

Tax Manager

Financial Accounting

Cost Accounting

Data Processing

Financial

Manager

Firm's

operations Investors

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations

(3)

(4a) Cash reinvested

(4a)

(4b) Cash returned to investors

(4b)

The Role of The Financial The Role of The Financial ManagerManager

Real assets

Goals of the firmGoals of the firm

Shareholders desire Shareholders desire wealth wealth maximizationmaximization

Do managers Do managers maximize maximize shareholder wealth?shareholder wealth?

““Agency Problems”Agency Problems”

Goals of the firmGoals of the firm

Agency Problem SolutionsAgency Problem Solutions

1 - Compensation plans1 - Compensation plans

2 - Board of Directors2 - Board of Directors

3 - Takeovers3 - Takeovers

4 - Specialist Monitoring4 - Specialist Monitoring

5 - Auditors5 - Auditors

The FirmThe Firm Purpose of the firm: value creationPurpose of the firm: value creation

– Does value maximization justify unethical Does value maximization justify unethical behaviorbehavior Enron Enron More suggestions?More suggestions?

Two aspects of corporate finance:Two aspects of corporate finance:– Raise fundingRaise funding– InvestmentInvestment

Balance sheet model of corporate Balance sheet model of corporate financefinance

The Balance-SheetThe Balance-Sheet

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Total Assets:

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Liabilities and Equity

The Balance-SheetThe Balance-Sheet

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Total Assets:

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Liabilities and Equity

What long-term investments should the firm engage in?

The Role of The Financial The Role of The Financial ManagerManager

Capital Budgeting DecisionCapital Budgeting Decision– also called the Investment Decisionalso called the Investment Decision

Tangible Assets

Portugal Telecom

@ 3,585 million Euros

Intangible Assets

Coca-Cola brand name

The Balance-SheetThe Balance-Sheet

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Total Assets:

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Liabilities and Equity

How can the firm raise the money for the required investments?

1. Financing Decision

2. Capital Structure

The Balance-SheetThe Balance-Sheet

Current Assets

Fixed Assets

1 Tangible

2 Intangible

Total Assets:

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Liabilities and Equity

Net working capital management