Class notes THE OBJECTIVE IN CORPORATE FINANCE

¨ Businesses have always struggled with mission statements. Put simply, what should the end game of a business? ¤ The simplest and most pragmatic answer is that it is to sell products and services that customers want, while generating the most you can in profits for their owners, over the long term. ¤ The pushback, often from non-business critics, has been that businesses should also serve society, not just minimizing social costs but also providing social benefits. ¨ In recent years, that pushback has found backing within business, with movements to expand business missions: ¤ To put business sustainability first ¤ To maximize the value to all stakeholders, not just owners ¤ To incorporate environmental, social and governance goals 3 A business has many stakeholders… 4 In running a business, one of these stakeholders has to be given primacy… Aswath Damodaran 4 ¨ In traditional corporate finance, the objective in decision making is to maximize the value of the firm. ¨ A narrower objective is to maximize stockholder wealth. When the stock is traded and markets are viewed to be efficient, the objective is to maximize the stock price. Assets Liabilities Assets in Place Debt Equity Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Residual Claim on cash flows Significant Role in management Perpetual Lives Growth Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Maximize firm value Maximize equity value Maximize market estimate of equity value 5 Giving corporate finance its focus… Aswath Damodaran 5 The Investment Decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate T