Topic 1
Introduction to corporate finance
Topic 1 : Content
1. What is corporate finance?
2. The foundations of corporate finance
3. Corporate finance and financial crisis
WHAT IS CORPORATE FINANCE?
Let’s suppose that the economy is composed of 4 types of people…
People People with extra People with ideas People
with no extra money money but not enough with both ideas
and no ideas but no ideas money and money
Corporate finance mainly focuses on these ones!
WHAT IS CORPORATE FINANCE?
Corporate finance defines and looks for the optimization of the financial flows
between supply and demand of funds.
Corporate finance analyses cash flows between the supply side (investors) and
demand side (companies) with an objective to increase the companies’ value
(shareholder value).
Figure 1. The complete cash flows of finance
Source: ADAIR, Troy A., Corporate Finance Demystified, McGraw Hill, 2006, p. 5..
WHAT IS CORPORATE FINANCE?
Each part of the financial cycle requires a specific type of decisions.
Corporate finance is responsible for decision making.
Fig. 2. Major decisions of corporate finance Fig. 3. Formal names of corporate finance decisions
Source: ADAIR, Troy A., Corporate Finance Demystified, McGraw Hill, 2006, p. 9.
WHAT IS CORPORATE FINANCE?
The objective of corporate finance is to manage efficiently funds in order to
maximaze firm value in the long run …
EXAMPLES OF INVESTMENT AND FINANCING DECISIONS
Company (revenue Recent Investment Decision Recent Financial or Dividend
in billions for 2008) Decision
Boeing ($61 billion) Production of 787 Dreamliner The cash flow from Boeing’s
aircraft, at a forecasted cost of operations allowed it to repay some FD
more than $10 billion of its debt and repurchase $2.8
billion of stock
Royal Dutch Shell Invested in a $1.5 billion deep- In 2008 returned $13.1 billion of
($458 billion) water oil and gas field in the gulf cash to its stakeholders by buying DD
of Mexico back their shares
Wal-Mart ($406 In 2008, it announced plans to In 2008 it raised $2.5 billion by an
FD?
billions) invest over a billion of dollars in issue of 5-year and 30 year bonds
90 new stores in Brazil
Toyota (¥26,289 In 2008 opened new engineering Returned ¥431 billion to
DD
billion) and safety testing facilities in shareholders in the form of
Michigan dividends
Lenovo ($16 billion) Expended its chain of retail Borrowed $400 million for 5 years FD
stores to cover over 2,000 cities from a group of banks
Source: Brealey, Myers, Allen, Principles of Corporate Finance, Mc Graw Hill, 2011, p.31.
© FC - FEE FC - Tema 1 - 6/9 Ver. 9/12
THE INVESTMENT TRADE-OFF
Cash
Investment Investment
Financial Shareholders
opportunity opportunity
manager
(real asset) (financial assets)
Invest Alternative: pay Shareholders invest
dividends to for themselves
shareholders
CORPORATE FINANCE FOUNDATIONS
• Cash flow matters more than accounting income
• Time value of money
• Importance of the opportunity cost
• Taxes affect profitability
• Balance between profitability, risk and liquidity
• Ethics in Finance
CORPORATE FINANCE AND CRISIS
• Short Video:
[Link]
• Long video: “Overdose The next financial crisis”
• Fault Lines: How Hidden Fractures Still Threaten the World
Economy by Raghuram G. Rajan CHAPTER SEVEN:
Betting the Bank
REFERENCES
COMPLEMENTARY REFERENCES
ADAIR, Troy A., Corporate Finance Demystified, McGraw Hill, 2010, cap. 1.
DAMODARAN, Aswath, Applied Corporate Finance, John Wiley, 2011, cap. 1
y 2.
RAJAN; G. Fault Lines: How Hidden Fractures Still Threaten the World
Economy by Raghuram CHAPTER SEVEN: Betting the Bank
BASIC REFERENCE
BREALEY, Richard A., MYERS, Stewart C. y ALLEN, Franklin, Principles of
Corporate Finance, McGraw Hill, 2011.