Corporate Finance
H1 ROLE AND OBJECTIVE OF FINANCIAL MANAGEMENT
C
C F goal= create more value within the company
Frims Cash Flow Generation Process
A
In accounting, revenue and costs are used, in CF cashflows are used
hareholder wealth maximizing
S
Maximizing PV of expected future cash flows based on its:
- Amount
- T iming
- R isk
- >Measured by Market Value the firm’s common stock
ffective decision making requires an understanding of the goals of the firm= shareholder Wealth
E
Maximizitation, NOT Profit Maximization
gency relationship
A
C orporate governance:
Principal
Elected by the meeting of SH
Agent: SH orders BOD to elect them
, roblem created by separation of owners vs management:
P
Management may maximize its own welfare instead of the shareholders’ wealth (ex. Agent wants
private jet, but too expensive for owner)
Agency costs (solution):
- Management incentives: stock options(part of their loan) , so that they share the same
interest
- Monitor performance (audits)
- C omplex organization structures : multiple managers who monitor eachother
- Protective covenants: restrictions written in the loan contract, ex. capital rationing: limiting
the amount of funds available for investment projects
Sample Organization Chart
Accounting related C F related
5 THE TIME VALUE OF MONEY
Simple and compound interest
- Simple Interest: Interest paid on the principal sum only
- C ompound Interest: Interest paid on the principal and on prior interest that has not been
paid or withdrawn: after one year, interest gets added to your account, that interest also
e arns interest -> total I earned goes up exponentially
,F uture Value interest Rate Factor:
>future value of 1 dollar invested for n years at an interest
=
rate i
resent Value of a Cash Flow
P
“ I want to earn x dollars in the future, how much do I invest rn?”
Interest Compounded More Frequently Than Once Per Year
F VIF : table 1
nnuity
A
= A series of equal cashflows (PMT) for a specified number of periods ( putting aside a sum
of money each year)
- Ordinary annuity is where the PMT occur at the end of each period.
- Annuity due is where the PMT occur at the beginning of each period
, For ordinary annuity….
>“If I had $4,212 today and
=
invested it at 6% per year, it
would grow exactly to $1,000 each
year for 5 years.”
For annuity due…
H1 ROLE AND OBJECTIVE OF FINANCIAL MANAGEMENT
C
C F goal= create more value within the company
Frims Cash Flow Generation Process
A
In accounting, revenue and costs are used, in CF cashflows are used
hareholder wealth maximizing
S
Maximizing PV of expected future cash flows based on its:
- Amount
- T iming
- R isk
- >Measured by Market Value the firm’s common stock
ffective decision making requires an understanding of the goals of the firm= shareholder Wealth
E
Maximizitation, NOT Profit Maximization
gency relationship
A
C orporate governance:
Principal
Elected by the meeting of SH
Agent: SH orders BOD to elect them
, roblem created by separation of owners vs management:
P
Management may maximize its own welfare instead of the shareholders’ wealth (ex. Agent wants
private jet, but too expensive for owner)
Agency costs (solution):
- Management incentives: stock options(part of their loan) , so that they share the same
interest
- Monitor performance (audits)
- C omplex organization structures : multiple managers who monitor eachother
- Protective covenants: restrictions written in the loan contract, ex. capital rationing: limiting
the amount of funds available for investment projects
Sample Organization Chart
Accounting related C F related
5 THE TIME VALUE OF MONEY
Simple and compound interest
- Simple Interest: Interest paid on the principal sum only
- C ompound Interest: Interest paid on the principal and on prior interest that has not been
paid or withdrawn: after one year, interest gets added to your account, that interest also
e arns interest -> total I earned goes up exponentially
,F uture Value interest Rate Factor:
>future value of 1 dollar invested for n years at an interest
=
rate i
resent Value of a Cash Flow
P
“ I want to earn x dollars in the future, how much do I invest rn?”
Interest Compounded More Frequently Than Once Per Year
F VIF : table 1
nnuity
A
= A series of equal cashflows (PMT) for a specified number of periods ( putting aside a sum
of money each year)
- Ordinary annuity is where the PMT occur at the end of each period.
- Annuity due is where the PMT occur at the beginning of each period
, For ordinary annuity….
>“If I had $4,212 today and
=
invested it at 6% per year, it
would grow exactly to $1,000 each
year for 5 years.”
For annuity due…
