Introduction to Corporate

Finance
What is Finance?
The short, quick and easy answer is money management the
science of managing money

What is the difference between Finance and Accounting and Finance
and Economics?

Accounting is about the recording of transactions in terms of money
it just says what happened.
In Economics you are focused on resources and production
process.
Finance is in between you want to deal with the real side of things
(production, etc.), but you want also to deal with the money side of
things.

Finance is a very recent field developed and separated only in the last
20-30 years that has separated from Economics and Financial
Economics

Finance within an Organization
Board of Directors
Chief Executive Officer (CEO)
Chief Operating Officer
(COO)
Marketing, Production, Human
Resources, and Other
Operating Departments
Chief Financial Officer (CFO)
Accounting, Treasury, Credit,
Legal, Capital Budgeting, and
Investor Relations
Financial Decisions
Financial decision is a decision about money to buy
or not to buy, how to spend money, how to get money,
how to invest money.

Financial decisions require the application of the most
elementary basic economic decision principle of
benefits vs. costs.
Finance as a Subject
The major areas of Finance include:

Financial Management

Financial Economics

Investments

Personal Finance

Public Finance

Financial Management
It is about managing the finances of businesses;

It is simply known as Corporate Finance or
Business Finance;

It is predominantly associated with managing the
assets and managing the liabilities of a corporation
and that is why Finance requires a good
understanding of all assets and liabilities, as well
as general understanding of accounting.
Financial Economics
It comprises of three subfields:

Financial Markets

Financial Institutions

Financial Instruments


These three fields jointly form the Financial System =>
Financial Economics is the subject which studies the Financial
System.
Investments
Security Analysis

Portfolio Theory

Market Analysis

Behavioral Finance

Personal Finance and Public Finance
Personal Finance is the subject of Finance that
studies the finances of a particular person or
family.

Public Finance is the subject of how to manage the
money of the government.



Forms of Business Organizations
Sole Proprietorship

Partnership

Corporation


Proprietorships and Partnerships
Advantages
Ease of formation
Subject to few regulations
No corporate income taxes

Disadvantages
Difficult to raise capital
Unlimited liability
Limited life

Often set up through LLCs/LLPs.

Corporation
Advantages
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital

Disadvantages
Double taxation
Cost of setup and report filing

Important Concepts
Shareholder Wealth it is basically whatever the shareholder
owns; the value of the assets owned by the shareholder.
Shares outstanding the number of shares which are sold to
the public and owned by the public.
Market Price actually we like to call it stock price; the price for
which you can sell the stock on the financial/stock market.
Value we like to use what is called fundamental value or
intrinsic value; the fundamental value in finance is
based/calculated as a discounted value a present discounted
value of all future cash flows; intrinsic value is an estimate of a
stock (investment) true value based on accurate/true risk and
on accurate evaluation of returns (returns are associated with
cash flows); based on complete information, correct information
of cash flows and proper risk;
Risk the probability of unfavorable outcome, an outcome that
is not favorable; the probability of things going wrong;
True risk vs. perceived risk the risk associated with particular
asset if all information is known about; the opposite is perceived
risk different people have different perception of risk based on
their age, different knowledge, experience, information,
background, expectations, etc.
Relationship between Stock Price
and Intrinsic Value
True Investor
Cash Flows
True
Risk
Perceived Investor
Cash Flows
Perceived
Risk
Managerial Actions, the Economic Environment,
Taxes, and the Political Climate
Stocks
Intrinsic Value
Stocks
Market Price
Market Equilibrium:
Intrinsic Value = Stock Price
Recent Business Trends
Corporate scandals have reinforced the importance of
business ethics, and have spurred additional
regulations and corporate oversight.

Increased globalization of business.

The effects of ever-improving information technology
have had a profound effect on all aspects of business
finance.

Stockholders now have more control of corporate
governance.
Potential Conflicts within an Organization
Principal-Agent Conflict

Conflicts between Stockholders and
Bondholders

Socially responsible management