Samenvatting Corporate financial & risk management - 19/20 eerste zit

Samenvatting Corporate financial & risk management
Current assets = inventory, cash, accounts receivable
Net working capital: difference between current assets and current liabilities


H1: goals and governance of the corporation
 Assets
 Firm has to decide how they will finance debt and equity = financing decision: where are
we going to get the money to spend on assets
 Capital budgeting = what assets are we going to invest in = investment decision (tangible
or intangible assets) (a.k.a. capex decision)
 Issuing new shares to buy a new product: financial and capital budgeting decision (acquisition is
investment, but decision to issue shares is financing)
 CFO spends most of time helping firm to make right investing/capital budgeting decisions
(NOT most of time on finance)
 Tangible asset: f.e. buying a new plane
 Intangible asset: f.e. expenditures
 CAPEX = capital expense: you can find it on balance sheet
 OPEX = operating expense: you can find it on income statement
 Financing decisions cannot add as much value as a good investment decision, but they can
destroy value if they are stupid (financing less important than investment)

 Definitions
 Financing decision: decision on the sources and amounts of financing (determines the
capital structure)
 Capital structure: the mix of long-term debt and equity financing
 Real assets: assets used to produce goods and services
 Financial assets: financial claims to the income generated by the firm’s real assets
 IPO: initial public offering: when a private company first sells shares to the public
 Corporation: a business organized as a separate legal entity owned by stockholders
(owners: stockholders, owners liability: limited, owner and business are taxed separately 
corporations pay taxes on their profits, and shareholders are taxed again when they receive
dividends from the company)
 partnership (owners: partners, managers are owners, unlimited liability, not taxed separately)
 sole proprietorship (owners: the manager, managers are owners, unlimited liability, not taxed
separately)

 Financial manager
 CFO: end responsibility of the financial policy and the corporate planning
 We use the term financial manager for everyone who is responsible for financing or
investment decisions (In every big decisions the financing and capital budgeting is important:
because major capital investments are tied to planning and organizing the project/finance)
 Controller
 Responsible for preparation of financial statements, accounting and taxes
(knows everything about accounting)
 Treasurer
 Responsible for cash management, raising capital and banking relationships
(knows everything about playing markets and banks)
(cash management: you have cash on the balance sheet for future expenses but each big
company is also a bank for itself: cash from firm in country A Is relocated to same firm in

, country B)
(banking relationships: good relationships with banks: can take decisions about loans quickly)





 Investors invest money in a firm. The financial manager uses the cash to pay for
real assets/investments. These assets will be used for the operations of the firm.
Later the assets operate cash inflows. The cash is either reinvested in the firm or is
returned to the investors.

 Goals of a corporation
 Shareholders want to maximize the value of their investment
 BUT value doesn’t equal profit
 Profits can be manipulated by reserves and depreciations
 Task of financial manager: increase market value
 The minimum ROE = the opportunity cost of capital (similar investment opportunities will
deliver me this much money, so this investment should bring me minimum the same) (expected return
of your investment should be minimum what you get in another similar investment, this should be the
opportunity cost)
 Investment trade-off
 Invest or not? Depends on the rate of return
 If the return offered by the investment project is higher than the rate of return
that shareholders can get by investing on their own, then the shareholders would
vote for the investment project (otherwise not: then they would want money back to
invest on their own)
 Minimum rate of return = hurdle rate = opportunity cost = As a company you
should always offer higher returns than the other opportunities

 Agency problem
= managers are agents for stockholders and are tempted to act in their own interests rather
than maximizing value
 Managers put own interests above goal of shareholders: creating market value (for
example: buying another company: manager wants to buy for much many because it looks good on
CV, but shareholders loose value)
 Agency cost: value lost from agency problems/problems with managers
 Another agency problem: markets don’t always work efficient: efficient when every
participant gets same information on same time, but in real world there’s insider trading:
sharing information to only 1 party of on different times: is bad for other parties
 Corporate governance: applying the laws: making sure you have the right practices in your
company for the trust of the shareholders (the more money of your own you put in the
company and loyal clients you have, the more trustworthy you are)
- Legal requirement (applying the law)
- Board of directors (supervisor of the management/represent shareholders)
- Activist shareholders (making sure you have enough money)
- Takeovers (having the right info so you can do takeover)
- Information for investors (influence strategy)
 Short selling
(you lend shares and sell them immediately. Then prices drop, as expected, and you buy