corporate financial management -...

CORPORATE FINANCIAL CORPORATE FINANCIAL MANAGEMENTMANAGEMENT

PART I INTRODUCTION(chapter 1-2)

Course objectivesCourse objectives

to enable you to develop the analytical, interpretive, and judgmental abilities required of a financial managerto provide a solid understanding of financial markets and how they operateto provide a wide range of realistic illustrations of financial analysis and management

Course objectivesCourse objectives

to demonstrate the relationship and integration of the finance function of an org with its other essential elements

to demonstrate how the financial manager communicates the results of financial analysis to decision makers and shareholders within the org framework

scheduleschedule

Part I Introduction– Ch.1 The Role and Objective of Financial

Management– Ch.2 The Domestic and International Financial

Marketplace

Part II Determinants of Valuation– Ch. 4 The Time Value of Money– Ch. 5 Analysis of Risk and Return– Ch. 6-7 Valuation of Financial Assets

scheduleschedule

Part III The Capital Investment Decision– Ch.8 Capital Budgeting and Cash Flow Analysis– Ch.9 Decision Criteria and Option Considerations– Ch.10 Capital Budgeting and Risk– Ch.11 The cost of Capital

Part IV The Capital Structure and Dividend Policy– Ch. 12 Capital Structure Concept– Ch. 13 Capital Structure Management in Practice– Ch. 14 Dividend Policy

scheduleschedule

Part V Working Capital Management– Ch.15 Financial Forecasting and Working Capital Policy– Ch.16 The Management of Cash and Marketable Securities– Ch.17 Management of Accounts Receivable and Inventories

Part VI Advanced Topics– Ch. 19 Lease Financing– Ch. 20 Financing With Derivatives

AssessmentAssessment

Homework 10%Quizzes 10%Project 20%Final exam 60%Total 100%

Chapter 1Chapter 1

The Role and Objective of the

Financial Management

IntroductionIntroduction

1. Definition of Financial management2. Forms of business organization3. Objective of financial management4. Organization of the financial management

function5. Financial management and other

disciplines

1. Definition of Finance1. Definition of Finance

Financial management is concerned with the maintenance and creation of economic value or wealth/responsibilities and activities of financial managersResponsibilities of financial managers: acquiring funds needed by a firm and for directing those funds into projects that will maximize the value of the firm for its owners

22. . Forms of business organizationsForms of business organizations

1) Sole proprietorship2) Partnership3) Corporation4) Factors related to optimal forms of

organization5) Agency problems in corporation

1) 1) Sole ProprietorshipSole Proprietorship

Owned by one personEasy formation advantageUnlimited liability disadvantageDifficulty raising funds disadvantageRepresent 75 percent of all businessesAccount for less than 6% of the dollar volume

2) 2) PartnershipPartnership

Owned by two or more personsClassified as general or limited

– General Partner

Has unlimited liability for all obligations of the businessdisadvantage

– Limited Partner

Liability limited to the partnership agreementadvantage

Partnership dissolves when a general partner dies or withdraws, a new partner entries. disadvantage

3) 3) CorporationCorporation

– Legal entity composed of one or more actual individuals or legal entities

Limited liability

Flexibility, Easy marketability of shares of

ownershipPermanency

Ability to raise capital

All advantages

4) 4) Optimal form of organization Optimal form of organization influenced byinfluenced by

CostComplexityLiabilityContinuityRaising capitalDecision makingTax considerations

5) 5) Agency problems in corporationAgency problems in corporation

Stockholders elect a board of directorsBoard of directors then elect the officers– Chairman of the board– Chief executive officer (CEO)– Chief operating officer (COO)– President– Chief financial officer (CFO)– Vice presidents– Treasurer– Secretary

Management

......continuedcontinued

Board of directors deals with broad policy

3 to 5 year strategic plan

Management makes most of the decisions

Day-to-day decisions following the strategic plan


Agency relationship– The principals hire the agents to perform a service on

behalf of the principles.

Agency problems– Inefficiencies that arise because of agency relationship

Agency costs– The costs incurred to minimize agency problems

a. Owners and managementa. Owners and management

Problems created by separation of owners and management– Management may maximize its own welfare [higher

compensation,more leisure time and lower risk] instead of the owners’ wealth.

e.g. job security, the consumption of on-the-job perquisites./ moral hazard, adverse selection

Agency costs [Min.]– costs to motivate – costs to monitor– bonding expenditure– the opportunity cost of loss profits

b. Owners and creditorsb. Owners and creditors

Problems created by different returns offered to owners and creditors– investment of higher risk approved by stockholders– new debt issuing approved by stockholdersAgency costs– protective covenants in bond indenturese.g. limitation on dividend, debt issuing,

in(di)vestment and certain ratios, poison put, etc.– a higher fixed returne.g. RJR Nabisco was required by KKR

3. Objective of financial management3. Objective of financial management

1) Profit maximization

2) Shareholder wealth maximizationthe primary goal

3) Social responsibility concerns

1) Profit maximization1) Profit maximization

MC=MBLacks a time dimension– offers no explicit basis for comparing

long-term and short-term profits.Definition of profit (GAAP)– Total amount / ROE / EPS p13

Not considers the risk

2) 2) Shareholder Wealth MaximizationShareholder Wealth Maximization

shareholder wealth= market price of common stock(firm value)= present value of the expected future returns

to owners

a. SWM objective benefitsa. SWM objective benefits

Considers the timing and risk of the benefits from stock ownership

Determines that a good decision increases the price of the firm’s common stock (C/S)

Is an impersonal objective

b. SWM is a market conceptb. SWM is a market concept

Maximizing Net Present Value of Cash Flows

Measured by Market Value of Common Stock

(1) (1) Cash flowCash flow

kingvitalcentral importantto the prosperity and survival of a firm

27

Figure 1.1A Firm’s Cash Flow Generation Process ......continuedcontinued


Cash Flows ≠ Accounting profit (earnings)

CF is an unambiguous, clear measure used for evaluating performance and making decisions.

CF avoids short-term manipulation by managers and conduces to take a long-term perspective in decision making.

(2) (2) NPV of an InvestmentNPV of an Investment

= PV of future cash flows - cash outlays

– a framework for evaluating future cash flows from an investment or a firm

– a bridge between CF and SWM

The NPV of an investment represents the contributions of that investment to the value of the firm and passes on to SWM.

(3) (3) Market value of common stockMarket value of common stock

Three Basic Factors Determine ~

Amount of

Timing of

Risk of

Expected cash flows


External Conditions Affecting ~

Economic environment factorsPolitical environment factorsConditions in financial markets


Competitive Forces Influencing ~

New entrantsSubstitute productsBargaining power of buyersBargaining power of suppliersRivalry among current competitors


1：利率调整对证券市场的影响

2：1998年港府反击国际炒家

—外汇市场、股票市场及股指期货市场之间的连动效应

3) Social responsibility concerns3) Social responsibility concerns

Run business in the interests of stakeholders– customers– suppliers– employees– creditors – community– government– stockholders, etc.

Be a good citizen; contribute to SWM

Small businessSmall business

Characteristics– grow rapidly– raise capital difficultly– lack the depth of managerial talent

More rely on accounting-based measuresAgency problems only exist in relation between owners and creditors

4. Organization of the FM function4. Organization of the FM function

CFO / Vice-president of financeController & Treasurer

Board of Director

Chief Executive Officer (CEO)

VP-Human Resources

VP-Marketing

VP- Finance(CFO)

VP-Engineering

VP-Manufacturing

Controller Treasurer

Financial Accounting

Cost Accounting

Internal Auditing

Tax Accounting

Accounts Payable

Information Systems

Cash /M&S Management

Capital Budgeting Analysis

Financial Planning

Credit Analysis

Investor Relations

Risk and Insurance Management

Pension Fund Management

Finance Committee Figure 1.2Organization of the FM function

EconomicsAccounting

MarketingProduction

Human ResourcesQuantitative Analysis

MIS

Finance

55. . Disciplines impacting financeDisciplines impacting finance

Chapter 2Chapter 2

The Domestic and International

Financial Marketplace

IntroductionIntroduction

1. An overview of the U.S. financial system2. The structure and operations of U.S.

security markets3. Market efficiency4. Income taxes and financial management5. Ten axioms that form the bases of

financial management

1. 1. the U.S. financial systemthe U.S. financial system

The vehicle that channels funds from saving

units to investing units

42

Figure 2.1Flow-of-Funds Diagram ......continuedcontinued

Financial marketFinancial market ...continued...continued

The vehicles through which financial assets are traded.

Money Market– dealing in short-term securities having maturities of one

year or less.

Capital Market– dealing in long-term securities having maturities

greater than one year.


Primary Market– Market where new securities are sold– Money goes to the issuer– Sold through a prospectus

Secondary Market– Market for existing securities are traded among

investors

2. 2. the U.S. security marketsthe U.S. security markets

Secondary MarketListed exchanges (e.g. NYSE)– Designated place of business– Requirements of securities listed or traded

Over-the-counter (OTC) market– Networks connected by communications– Dealers post prices to buy and sell

Stock market indexes– DJIA, DJTA, S&P 500, NASDAQ


RegulationsFederal– Securities Act of 1933 – Securities Exchange Act of 1934– Securities & Exchange Commission (SEC)

Regulates disclosure of information in new securities and all publicly traded firmsExample: Insider trading

– SEC attempts to prevent profiting from unpublished information.

3. 3. Capital market efficiencyCapital market efficiency

Capital markets are efficient – if stock prices provide an unbiased estimate of

the true value of an enterprise. – if prices instantaneously and fully reflect all the

risk and economically relevant information about a security’s prospective returns.

“Glue” that bonds the PV of a firm’s net cash flow to shareholders’ wealth

1) 1) Three degrees of market efficiencyThree degrees of market efficiency

a. Weak form

b. Semi-strong form

c. Strong form

a. Weak forma. Weak form

– Security prices fully reflect all historicalinformation.

– No investor can earn excess returns using historical prices or returns.

‘technical analysis’

b. Semib. Semi--strong formstrong form

– Security prices fully reflect historical and publicly available information.

– No investor can earn excess returns based on an investment strategy using public information.

‘fundamental analysis’

c. Strong formc. Strong form

– Security prices fully reflect all historical,public, and private information.

– No investor can earn excess returns using public and private information.

2) 2) Market efficiency implications for Market efficiency implications for financial managersfinancial managers

Timing or gamblingAn expected NPV of zero – (i.e. expected return equals required return)Corporate diversification - unnecessarySecurity price adjustment – reflect expected cash flows and risk of the cash flowsBehavioral finance perspective – anomalies show investors may not be fully rational

Holding period return ( HPR)Holding period return ( HPR)

– The return from holding an investment for one period

– holding period yield, realized or ex post rate of return

100%×Beginning price

Ending price – Beginning price + Distributions

44. . Income taxesIncome taxes Appendix AAppendix A

Implications for financial managers– Capital structure policy

Debt or equity financing– Dividend policy

Paying dividends or retaining earnings– Capital budgeting

After-tax cash flows– Lease or buy decision

Leveraged leases p730


Taxable income= Revenues - Tax deductions– Operating or ordinary income– Capital gains income– Dividend income– Loss carrybacks and carryforwards

Income tax rates– marginal tax rate– average tax rate

S corporation


Depreciation methodsMACRS For tax purpose– Asset class [ Recovery period ]

3, 5, 7, 10, 15, 20 / 27.5, 31.5(or 39) years– Depreciation methods

200%DB, 150%DB / Straight-line methodHalf-year convention / Mid-month conventionExpected salvage value is ignored.

– Depreciation allowances affect income tax owed, then cash flows available to shareholders

5.Ten axioms 5.Ten axioms

The risk-return trade-off– we won’t take on additional risk unless we

expect to be compensated with additional return.

1

The riskThe risk--return relationshipreturn relationshipex

pect

ed r

etur

n

risk

expected return for delaying consumption

expected returnfor taking on added risk

Ten axiomsTen axioms

All risk is not equal– Some risk can be diversified away, and some

cannot

2

time

return

Asset B

Asset A

Combination of asset A and B


The time value of money– A dollar received today is worth more than a

dollar received in the future

3


Cash- not profits- is king4


Incremental cash flows– It’s only what changes that counts

5


Taxes bias business decisions6


The curse of competitive markets– Why it’s hard to find exceptionality profitable

projects

7


Efficient capital markets– The markets are quick and the prices are right.– In the efficient market, the speed with which

securities prices reflect all available information is so quick that there are no opportunities for investors to earn excess profit from the available information.

8


The agency problem– Managers won’t work for the owners unless it’s

in their best interest

9


Ethical consideration– Ethical behavior is doing the right thing, and

ethical dilemmas are everywhere in finance.

10


3: 1995年“327”风波的启示

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