1
Financieel management
Part 1- Value
Chapter 1- introduction to Corporate Finance
Corporations make financial decisions:
- What are these decisions?
- What are they intended to accomplish?
Corporations invest in real assets, which generate income.
Some of these assets are:
- Tangible: machinery, plant,…
=assets that you can touch and kick
- Intangible: brand names, patents,…
Corporations finance their investments by
- Borrowing
- Retaining
- Reinvesting cahs flow
- Selling additional shares of stock
Financial managers faces 2 financial questions:
- What investment should the corporation make?
- How should it pay for these investments?
The investment decision involves spending money; financing decion involves raising it.
A large corporation=> may have 1000 shareholders =>Shareholders want the financial
manager to increase the value of the corporation:
The secret of success in financial management is to increase value
Easy to say but not very helpful
“buy low, sell high”-investor è the problem is how to do it?
In this book we conclude by explaining why increasing the market value of the corporation
is a sensible financial goal.
Financial managers:
- increase value whenever the corporation earns a higher return than shareholders
can earn for themselves.
- Refer to the opportunity cost of the capital contributed by shareholders
samenvatting financieel management- Nora Bari
, 2
Corporations must combine governance rules :
All managers + employees + financial managers = pull together to increase value
Shareholders want the maximum honest stock price not the maximum possible stock price!
Chapters in this book:
1. Corporate finance is all about maximizing value
2. The opportunity cost of capital sets the standard for investment decisions
3. A safe dollar is worth a risky dollar
4. Smart investment decisions create more value than smart financing decions
5. Good governance matters; good governance and appropriate incentives also help
block out temptations to increase stock price by illegal or unethical means.
1-1- Corporate investment and financing decisions
A corporation needs an almost endless variety of real assets => they need to be paid for. A
corporation pays for its real assets by selling claims *on them and on the cash flow that
they will generate.
*these claims are called financial assets or securities**
Example: bank loan
The bank provides the corp with cash in exchange for a financial asset, which is the corp’s
promise to repay the loan with intrest. An ordinary bank loan is not a security, however,
because it’s held by the bank and is not traded in financial markets.
Example: corp bond
The corp sells the bond to investors in exchange for the promise to pay interest on the bond and
to pay off the bond at its maturity. The bond is a financial asset and also a securitie.
**securities= bond, shares of stock and dizzying variety
Investment decision= purchase of real assets
Financing decision=sale of securities and other financial assets
o Investment decision= purchase of real assets + managing assets already in place
and deciding when to shut down and dispose of assets when they are no longer
profitable.
o Financing decision=sale of securities and other financial assets + meeting its
obligations to banks, bondholders, and stockholders that have contributed
financing in the past.
Investment decisions
samenvatting financieel management- Nora Bari
, 3
Investment decisions are often referred to as capital budgeting or capital expenditure =
CAPEX decisions because most large corp prepare an annual capital budget listing.
Financial managers does not make large investments on a daily basis. Most investment
decisions are smaller and simpler, such as the purchase of a truck, machine tool or computer
system. Corp make thousands of these smaller investment every day.
Note: finan managers do not make major investment decisions in solitary confinement,
they may work as a part of a team of engineers and managers from manufacturing,
marketing and others.
Financing decisions
A corp can raise money form lenders or from shareholders:
- If it borrows, the lender contribute the cash, and the corp promises to pay back the
debt plus a fixed rate of intrest
- If the shareholders put up the cash, they do not get a fixed return but they hold
shares of stock and get a fraction of profits and cash flow
Shareholders => equity investors=> equity financing
The choice between debt and equity financing = capital* structure decision
*refers to the firm’s sources of long-term financing
Corporations raise equity financing in 2 ways:
- They can issue new shares of stock.
- The corp can take the cash flow generated by its existing assets and reinvest that
cash in new assets
What happens when a corp does not reinvest all of the cash flow generated by its
existing assets? It may hold the cash in reserve for future investment of it may pay
the cash back to its shareholders.
The decision to pay dividends or repurchase shares is called the payout decision.
In some ways, financing decisions are less important than investment decisions
What is a corporation?
o a legal entity.
o a legal person that owned by its shareholders. As a legal person, the corp can make
contracts, carry on a business, borrow or lend money.
o Owned by its shareholders but legally distinct from them. Therefore the
shareholders have limited liability, which means that they cannot be held personally
responsible for the corporation’s debts.
Public companies
samenvatting financieel management- Nora Bari
Financieel management
Part 1- Value
Chapter 1- introduction to Corporate Finance
Corporations make financial decisions:
- What are these decisions?
- What are they intended to accomplish?
Corporations invest in real assets, which generate income.
Some of these assets are:
- Tangible: machinery, plant,…
=assets that you can touch and kick
- Intangible: brand names, patents,…
Corporations finance their investments by
- Borrowing
- Retaining
- Reinvesting cahs flow
- Selling additional shares of stock
Financial managers faces 2 financial questions:
- What investment should the corporation make?
- How should it pay for these investments?
The investment decision involves spending money; financing decion involves raising it.
A large corporation=> may have 1000 shareholders =>Shareholders want the financial
manager to increase the value of the corporation:
The secret of success in financial management is to increase value
Easy to say but not very helpful
“buy low, sell high”-investor è the problem is how to do it?
In this book we conclude by explaining why increasing the market value of the corporation
is a sensible financial goal.
Financial managers:
- increase value whenever the corporation earns a higher return than shareholders
can earn for themselves.
- Refer to the opportunity cost of the capital contributed by shareholders
samenvatting financieel management- Nora Bari
, 2
Corporations must combine governance rules :
All managers + employees + financial managers = pull together to increase value
Shareholders want the maximum honest stock price not the maximum possible stock price!
Chapters in this book:
1. Corporate finance is all about maximizing value
2. The opportunity cost of capital sets the standard for investment decisions
3. A safe dollar is worth a risky dollar
4. Smart investment decisions create more value than smart financing decions
5. Good governance matters; good governance and appropriate incentives also help
block out temptations to increase stock price by illegal or unethical means.
1-1- Corporate investment and financing decisions
A corporation needs an almost endless variety of real assets => they need to be paid for. A
corporation pays for its real assets by selling claims *on them and on the cash flow that
they will generate.
*these claims are called financial assets or securities**
Example: bank loan
The bank provides the corp with cash in exchange for a financial asset, which is the corp’s
promise to repay the loan with intrest. An ordinary bank loan is not a security, however,
because it’s held by the bank and is not traded in financial markets.
Example: corp bond
The corp sells the bond to investors in exchange for the promise to pay interest on the bond and
to pay off the bond at its maturity. The bond is a financial asset and also a securitie.
**securities= bond, shares of stock and dizzying variety
Investment decision= purchase of real assets
Financing decision=sale of securities and other financial assets
o Investment decision= purchase of real assets + managing assets already in place
and deciding when to shut down and dispose of assets when they are no longer
profitable.
o Financing decision=sale of securities and other financial assets + meeting its
obligations to banks, bondholders, and stockholders that have contributed
financing in the past.
Investment decisions
samenvatting financieel management- Nora Bari
, 3
Investment decisions are often referred to as capital budgeting or capital expenditure =
CAPEX decisions because most large corp prepare an annual capital budget listing.
Financial managers does not make large investments on a daily basis. Most investment
decisions are smaller and simpler, such as the purchase of a truck, machine tool or computer
system. Corp make thousands of these smaller investment every day.
Note: finan managers do not make major investment decisions in solitary confinement,
they may work as a part of a team of engineers and managers from manufacturing,
marketing and others.
Financing decisions
A corp can raise money form lenders or from shareholders:
- If it borrows, the lender contribute the cash, and the corp promises to pay back the
debt plus a fixed rate of intrest
- If the shareholders put up the cash, they do not get a fixed return but they hold
shares of stock and get a fraction of profits and cash flow
Shareholders => equity investors=> equity financing
The choice between debt and equity financing = capital* structure decision
*refers to the firm’s sources of long-term financing
Corporations raise equity financing in 2 ways:
- They can issue new shares of stock.
- The corp can take the cash flow generated by its existing assets and reinvest that
cash in new assets
What happens when a corp does not reinvest all of the cash flow generated by its
existing assets? It may hold the cash in reserve for future investment of it may pay
the cash back to its shareholders.
The decision to pay dividends or repurchase shares is called the payout decision.
In some ways, financing decisions are less important than investment decisions
What is a corporation?
o a legal entity.
o a legal person that owned by its shareholders. As a legal person, the corp can make
contracts, carry on a business, borrow or lend money.
o Owned by its shareholders but legally distinct from them. Therefore the
shareholders have limited liability, which means that they cannot be held personally
responsible for the corporation’s debts.
Public companies
samenvatting financieel management- Nora Bari
