Summary Managerial Finance - two study books

THE MATH OF VALUE




(IR = Investment Rate)




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,CLASS 1 – BAM Ch1 – INTRODUCTION


Corporate finance  financial decision making
1. What investment should the corporation make? (spending)
2. How should it pay for those investments? (raising)




Goal of Financial Management  to create VALUE,
That is when the Corporation can earn a higher return that shareholders can earn
for themselves.
Where outside investment opportunities set the standard for internal investments,
the opportunity cost, e.g. the cost of capital.




Five key themes:
1. Corporate Finance is all about maximizing VALUE
2. Where the opportunity cost of capital sets the standard for investment
decisions
3. A safe dollar is worth more than a risky dollar
4. Smart investment decisions create more value than smart financing
decisions
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, 5. Good governance matters (due to e.g. the principal-agent problem)


Real assets vs. Financial assets and Securities
(securities are a type of fin. assets which can be traded, incl. bonds and stocks)
Investment decision = purchase of real assets Capital Budgeting or
Expenditure (CAPEX)
Financing decision = sale of financial assets




Capital structure = choice between debt and equity financing


Financing equity:
1. Issuing shares
2. Retaining cash flows


A Corporation is a legal entity where shareholders have limited liability.
 Upside: separation of Ownership vs. Control, as it gives
‘permanence’
 Downside: principle-agent problems, differences in interests
 Downside: Tax drawback, as corporations pay tax and shareholders are
taxed again




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