BANKING AND FINANCE
CHAPTER 1: GOALS AND GOVERNANCE OF THE CORPORATION
INVESTMENT AND FINANCING DECISIONS
CASH OUT = how the money is spent
- Where did the cash go?
- Which investments have been made?
CASH IN = how the money is raised
- Where did the cash come from?
- How to finance the investments?
Investment decisions:
- Capital expenditure (CAPEX) or capital budgeting decisions = spend
money
- Purchase of real assets = assets used to produce goods & services
- Tangible or intangible
- Long/short term consequences pay off
- Billion USD/EUR or small money
- Success story or complete disaster
Financing decisions:
- Decisions on the sources and the amount of financing = raise
money
- Issuance of financial assets to finance investments in real assets
- Capital structure decision: debt financing vs equity financing
EXAM QUESTION: what does the capital structure mean? = how
is the company being financed
- Variety of financial assets: stocks, loans & bonds
- Can destroy value if they are stupid or ambushed by bad news
WHAT IS A CORPORATION?
Corporation:
- Separate legal entity: created via articles of incorporation
- Distinct from its shareholders: shareholders have limited liability
o Can lose entire investment, but nothing more
o Creditors of the company have no recourse to other assets of the
shareholders
- Permanent: can in theory live forever
, - Publicly listed (you can buy shares) or privately owned
- Shareholders do not own the real assets: indirect ownership via
financial assets
WHO IS THE FINANCIAL MANAGER?
Chief financial officer (=CFO) financial policy + corporate strategy
- Treasurer: cash management + capital raising + investor relations
- Controller: financial statements + accounting + taxes
Role of the CFO:
1. Cash is raised from investors
2. Cash is used to invest in real assets to run the business
investments
3. Once business is operative, assets generate cash inflow
4. Cash is either reinvested (a) or paid out (b)
GOALS OF THE CORPORATION
The investment trade off:
Suppose:
- Return is expected to be 12% for every $100 they invest, they
get $112 back
- Alternative investment opportunities at a return rate of 10%
investing in 12% to maximize ROI
If you’re a shareholder, you invest because you want return!!
,- Every shareholder has their minimum rate of return (=hurdle rate
=opportunity cost of capital)
- Return < hurdle rate not investing
- Return ≥ hurdle rate yes investing
, CHAPTER 2: FINANCIAL MARKETS AND INSTITUTIONS
THE FLOW OF SAVINGS TO CORPORATIONS
Flow:
1. Cash is raised from debt or equity investors corporations are
looking for money (cash shortfall)
2. Cash is used to invest in real assets to run the business all
money invested comes from investor savings (cash surplus)
3. Once business is operational, assets generate cash inflows
4. Cash is either reinvested (a) or paid out as a dividend (b)
A well performing financial system is key to ensure that savings can
efficiently fuel economic growth
Direct or indirect flow to the corporation?
- Investor financial markets corporation = DIRECT
- Investor financial intermediaries corporation = INDIRECT
- Investor financial institutions corporation = INDIRECT
Financial
markets:
financing
no financing
= protection
for risks
= hedging
CHAPTER 1: GOALS AND GOVERNANCE OF THE CORPORATION
INVESTMENT AND FINANCING DECISIONS
CASH OUT = how the money is spent
- Where did the cash go?
- Which investments have been made?
CASH IN = how the money is raised
- Where did the cash come from?
- How to finance the investments?
Investment decisions:
- Capital expenditure (CAPEX) or capital budgeting decisions = spend
money
- Purchase of real assets = assets used to produce goods & services
- Tangible or intangible
- Long/short term consequences pay off
- Billion USD/EUR or small money
- Success story or complete disaster
Financing decisions:
- Decisions on the sources and the amount of financing = raise
money
- Issuance of financial assets to finance investments in real assets
- Capital structure decision: debt financing vs equity financing
EXAM QUESTION: what does the capital structure mean? = how
is the company being financed
- Variety of financial assets: stocks, loans & bonds
- Can destroy value if they are stupid or ambushed by bad news
WHAT IS A CORPORATION?
Corporation:
- Separate legal entity: created via articles of incorporation
- Distinct from its shareholders: shareholders have limited liability
o Can lose entire investment, but nothing more
o Creditors of the company have no recourse to other assets of the
shareholders
- Permanent: can in theory live forever
, - Publicly listed (you can buy shares) or privately owned
- Shareholders do not own the real assets: indirect ownership via
financial assets
WHO IS THE FINANCIAL MANAGER?
Chief financial officer (=CFO) financial policy + corporate strategy
- Treasurer: cash management + capital raising + investor relations
- Controller: financial statements + accounting + taxes
Role of the CFO:
1. Cash is raised from investors
2. Cash is used to invest in real assets to run the business
investments
3. Once business is operative, assets generate cash inflow
4. Cash is either reinvested (a) or paid out (b)
GOALS OF THE CORPORATION
The investment trade off:
Suppose:
- Return is expected to be 12% for every $100 they invest, they
get $112 back
- Alternative investment opportunities at a return rate of 10%
investing in 12% to maximize ROI
If you’re a shareholder, you invest because you want return!!
,- Every shareholder has their minimum rate of return (=hurdle rate
=opportunity cost of capital)
- Return < hurdle rate not investing
- Return ≥ hurdle rate yes investing
, CHAPTER 2: FINANCIAL MARKETS AND INSTITUTIONS
THE FLOW OF SAVINGS TO CORPORATIONS
Flow:
1. Cash is raised from debt or equity investors corporations are
looking for money (cash shortfall)
2. Cash is used to invest in real assets to run the business all
money invested comes from investor savings (cash surplus)
3. Once business is operational, assets generate cash inflows
4. Cash is either reinvested (a) or paid out as a dividend (b)
A well performing financial system is key to ensure that savings can
efficiently fuel economic growth
Direct or indirect flow to the corporation?
- Investor financial markets corporation = DIRECT
- Investor financial intermediaries corporation = INDIRECT
- Investor financial institutions corporation = INDIRECT
Financial
markets:
financing
no financing
= protection
for risks
= hedging
