Corporate Finance

Dr Nguyen Dinh Dat

• Ross, Stephen A., et al. Fundamentals of Corporate Finance
• Corporate Finance, CFA level 1
The content
• Chapter 1: Introduction
• Chapter 2: Capital Budgeting
• Chapter 3: Financial Statements Analysis and Financial Models
• Chapter 4: Working Capital Management
• Chapter 5: Capital Structure
Chapter 1: Introduction
What is Corporate Finance?
•Investment
•Financing
•Dividend
•Working Capital
→ All interconnected
 Investment Decision
cashflow, risk and longterm sustainability

• Investment is the most important financial decision.

• The key question is not “which option is bigger,” but “which creates more value.”
• Decisions should be based on cash flows, risk, and long-term sustainability.
• A smaller, more efficient investment can sometimes generate higher and more stable value over time.
• This is the core principle of investment decision-making in corporate finance.
Financing Decision
• Financing asks: where does the money come from?
• Firms can use debt (borrowing) or equity (investors).
• Debt requires fixed repayments → higher pressure and risk.
• Equity avoids fixed payments but shares ownership and profits. ownership and profit

• The goal is to balance cost and risk.

• The best firms choose the right mix of debt and equity for their situation.
Dividend Decision
•Profit creates a new decision: spend or reinvest?
•Taking profits out gives shareholders immediate returns.
financial and strategic decision
•Reinvesting supports future growth but delays returns.
•This is both a financial and strategic decision.
•Dividend policy balances short-term satisfaction and long-term value.
•It also signals a company’s performance and future strategy.
Working Capital
•Working capital is practical and crucial for daily operations.
•Profit does not guarantee survival—cash flow matters more.
•A firm can be profitable but still run out of cash.
•Issues like excess inventory or delayed payments reduce liquidity.
•Businesses must still pay expenses like rent and salaries.
•Working capital management ensures liquidity while using resources efficiently.
ensure liquidity
THE FINANCIAL MANAGER
Cash Flow
•Cash flow is the most important concept in corporate finance.
•Investment, financing, and dividends all connect to cash flow.
•Profit does not always mean actual cash received.
•A firm can report profit but still lack cash.
•Without cash, a business cannot pay its expenses.
•Cash flow shows the real financial health of a company.
The Importance of Cash Flows
The most important job of a financial manager is to create value from
the firm ’ s capital budgeting, financing, and net working capital
activities. How do financial managers create value? The answer is that
the firm should:
1. Try to buy assets that generate more cash than they cost.
2. Sell bonds and stocks and other financial instruments that raise more
cash than they cost.
Thus, the firm must create more cash flow than it uses. The cash flows
paid to bond-holders and stockholders of the firm should be greater
than the cash flows put into the firm by the bondholders and
stockholders.
Cash Flows between the Firm and the Financial
Markets
The Goal of Financial Management
• Survive.
Maximize • Avoid financial distress and
profits.
Survive. bankruptcy.
• Beat the competition.
Avoid
financial
distress and
• Maximize sales or market share.
bankruptcy.
• Minimize costs.
• Maximize profits.
• Maintain steady earnings growth.
maximize value of owner’s
equity.
The Agency Problem and Control
of the Corporation
Ownership and management are separated in modern firms.
Shareholders own the company, but managers control decisions.
This creates the agency problem.
Managers may act in their own interests, not shareholders’.
Conflicts can involve pay, benefits, or short-term goals.
Corporate finance aims to manage and reduce these conflicts.
AGENCY RELATIONSHIPS
Agency costs
• Agency costs refers to the costs of the conflict of interest between
stockholders and management. These costs can be indirect or direct.
• An indirect agency cost is a lost opportunity.
• Direct agency costs come in two forms.
o The first type is a corporate expenditure that benefits management but costs
the stockholders.
o The second type of direct agency cost is an expense that arises from the need
to monitor management actions.
How does the manager act in the
stockholders’ interests?
Key question: how to ensure managers act in shareholders’ interests?
Theory and reality often differ due to agency problems.
Factor 1: Incentives (alignment of interests)
Managers should benefit when shareholders benefit.
Compensation linked to stock performance improves alignment.
Short-term bonuses may lead to short-term thinking.
Factor 2: Control (monitoring and discipline)
Managers must be accountable and replaceable if they perform poorly.
Mechanisms include boards of directors and market pressure.
Agency problems are reduced when incentives and control are effective.
Managerial Compensation
Focus: managerial compensation as a key incentive.
Managers act in shareholders’ interests when financially motivated.
Reason 1: Pay linked to performance
•Compensation often tied to profits and stock price.
•Stock options reward managers when share value rises.
•Their wealth increases with shareholder wealth.
Reason 2: Career opportunities
•Good performance leads to promotion and better job prospects.
•Successful managers gain higher pay and reputation.
•Both current pay and future career incentives align managers with shareholders.
Control of the Firm Control

Focus: control of the firm as a key governance factor.

Incentives alone are not enough—control mechanisms are needed.
Shareholders ultimately control the firm through voting rights.
They elect the board of directors, who oversee and can replace managers.
Managers are accountable to the board; the board is accountable to shareholders.
Mechanism 1: Proxy fight
Shareholders can gain voting power to replace the board and management.
Mechanism 2: Takeover
Poorly managed firms become acquisition targets.
New owners often replace management to improve performance.
Control mechanisms create pressure for managers to act in shareholders’ interests.
STAKEHOLDERS
Regulation
• Governments require firms to disclose relevant information.
• Disclosure ensures all investors have equal access to information.
• This helps reduce conflicts of interest.
• Regulation improves transparency and fairness in markets.
• However, it also imposes costs on companies.
• Any evaluation of regulation must consider both benefits and costs.
Question
• Question 1: Describe corporate governance
• Question 2: Describe functions and responsibilities of a company’s
board of directors and its committees.
• Question 3: Identify potential risks of poor corporate governance and
stakeholder management and identify benefits from effective
corporate governance and stakeholder management.
Questions
• Question 4: Agency Problems Who owns a corporation? Describe the
process whereby the owners control the firm ’ s management. What
is the main reason that an agency relationship exists in the corporate
form of organization? In this context, what kinds of problems can
arise?
• Question 5: Agency Problems and Corporate Ownership In recent
years, large financial institutions such as mutual funds and pension
funds have become the dominant owners of stock in the United
States, and these institutions are becoming more active in corporate
affairs. What are the implications of this trend for agency problems
and corporate control?