Summary Fundamentals of corporate
FINANCE
Table of contents:
Chapter 1 Introduction to Corporate Governance 5
1.1. Corporate finance and the financial manager 5
What is corporate finance? 5
The financial manager 5
Financial Management Decisions 5
1.2 The goal of financial management 6
Possible Goals 6
An Appropriate Goal 6
A More General Goal 6
The Triple Bottom Line 6
1.3 Financial markets and the corporation 7
Cash Flows To And From The Firm 7
Primary versus Secondary Markets 8
1.4 The economic environment 9
Macroeconomic Policy 9
European Monetary Union 9
1.5 Corporate finance in action: the case of alphabet inc. 9
Chapter 2 Corporate Governance 10
2.1 Forms of Business Organisation 10
Sole Trader 10
Partnership 11
Corporation 12
Non-profit organisations 12
2.2 The Agency Problem and Control of the Corporation 13
Type I Agency Relationships 13
Management Goals 13
Do Managers Act in the Shareholders’ Interest 13
Type II Agency Relationships 15
Stakeholders 15
2.3 International Corporate Governance 16
Raising Capital 18
Financial Markets 18
Primary Market 19
Secondary Market 19
Chapter 3 Financial statement analysis 20
, Cash flow from assets 20
Cash flow from investing activities 20
Financing activities 20
Financial ratios 20
Liquidity of short-term solvency ratios 20
Financial leverage or long-term solvency ratios 20
Asset management or turnover ratios 21
Profitability ratios 21
Market value ratios 21
Market vs. book value 21
The DuPont Identity 21
The time value of money (chapter 4 & 5) 22
Effective annual rate 22
Chapter 6 bonds & Bond valuation 23
Financial securities 23
Valuation of stocks & bonds 23
Interest rate risk 24
The longer the time to maturity, the greater the interest rate risk. 24
The lower the coupon rate, the greater the interest rate risk. 25
The term structure of interest rates 25
Chapter 7 stocks & stock valuation 26
Characteristics of common stocks 26
Valuation of common stock 26
Differences between bonds & stocks 27
The valuation of common stock 27
1. Single holding period 27
2. Zero growth 28
3. Constant growth 28
4. Non-constant growth 29
Chapter 8 Capital budgeting: Investment Criteria 30
Capital budgeting: investment criteria 30
Payback period 30
Chapter 9 Project cash flows 31
Project evaluation 31
Sunk cost 31
Opportunity cost 31
Side effects (erosion) 31
Project operating cash flow 31
Incremental cash flows 32
Chapter 12 Risk & Return 32
Risk & return 32
1
, What is risk 32
Individual securities 32
Types of risk 33
Capital asset pricing model & beta 33
Risk premium 33
Chapter 13 Cost of capital 34
Cost of capital: A starting point 34
The weighted average cost of capital (WACC) 34
Cost of each component sources of capital 34
1. Debt component (Rd): 34
2. Preferred stock (PS) component: 35
3. Equity component: 35
Cost of equity component 35
Internal vs external equity 35
Flotation cost 35
Chapter 15 Financial leverage and capital structure 36
How should a firm go about choosing its debt-equity ratio? 36
The effects of financial leverage 36
Different theories of capital structure 36
1 Modigliani & Miller on Optimal Capital Structure 36
Proposition 1 with no tax 36
Proposition 1 with taxes 38
Proposition 2 with tax 38
2 The static theory of capital structure 39
3 The pecking order hypothesis 40
Chapter 16 Dividends & dividend policy 41
Different types of dividends 41
Does dividend policy matter? 42
Real world Factors affecting dividend payouts 42
Share repurchases, an alternative to cash dividends 42
Cash dividends vs repurchase 42
Real world considerations 43
Stock dividend & stock splits 43
Chapter 17 Short-term financial planning 44
Cash management vs liquidity management 44
Reasons for holding cash 44
Target cash balance 45
The BAT model 45
Cash discounts 46
Chapter 20 Financial risk management: forwards, futures & swaps 47
Unsystematic vs systematic risk 47
Unsystematic risks 47
2
, Systematic risk 47
The risk profile of a seller 47
Hedging & Price volatility 48
Hedging with forward contracts 48
The basics 48
Example for IMPORTERS - advantages for the forward contract 48
Example for exporters - disadvantage for the forward contract 49
Future contracts 49
Future market hedge 50
Swap contracts 50
Example of an interest rate swap 50
Chapter 21 Hedging with options: calls, puts & Intrinsic value 51
Hedging with option contracts 51
Profit & loss for the BUYER 51
Profits from call options 52
Options: market speculation 52
Profits from put options 52
Profit & loss for the writer of a put option on X 53
Value (premium) of a call option 53
How about put option-> 54
An example of intrinsic value of call options 54
Valuing options 54
Black-scholes option pricing model 54
3
FINANCE
Table of contents:
Chapter 1 Introduction to Corporate Governance 5
1.1. Corporate finance and the financial manager 5
What is corporate finance? 5
The financial manager 5
Financial Management Decisions 5
1.2 The goal of financial management 6
Possible Goals 6
An Appropriate Goal 6
A More General Goal 6
The Triple Bottom Line 6
1.3 Financial markets and the corporation 7
Cash Flows To And From The Firm 7
Primary versus Secondary Markets 8
1.4 The economic environment 9
Macroeconomic Policy 9
European Monetary Union 9
1.5 Corporate finance in action: the case of alphabet inc. 9
Chapter 2 Corporate Governance 10
2.1 Forms of Business Organisation 10
Sole Trader 10
Partnership 11
Corporation 12
Non-profit organisations 12
2.2 The Agency Problem and Control of the Corporation 13
Type I Agency Relationships 13
Management Goals 13
Do Managers Act in the Shareholders’ Interest 13
Type II Agency Relationships 15
Stakeholders 15
2.3 International Corporate Governance 16
Raising Capital 18
Financial Markets 18
Primary Market 19
Secondary Market 19
Chapter 3 Financial statement analysis 20
, Cash flow from assets 20
Cash flow from investing activities 20
Financing activities 20
Financial ratios 20
Liquidity of short-term solvency ratios 20
Financial leverage or long-term solvency ratios 20
Asset management or turnover ratios 21
Profitability ratios 21
Market value ratios 21
Market vs. book value 21
The DuPont Identity 21
The time value of money (chapter 4 & 5) 22
Effective annual rate 22
Chapter 6 bonds & Bond valuation 23
Financial securities 23
Valuation of stocks & bonds 23
Interest rate risk 24
The longer the time to maturity, the greater the interest rate risk. 24
The lower the coupon rate, the greater the interest rate risk. 25
The term structure of interest rates 25
Chapter 7 stocks & stock valuation 26
Characteristics of common stocks 26
Valuation of common stock 26
Differences between bonds & stocks 27
The valuation of common stock 27
1. Single holding period 27
2. Zero growth 28
3. Constant growth 28
4. Non-constant growth 29
Chapter 8 Capital budgeting: Investment Criteria 30
Capital budgeting: investment criteria 30
Payback period 30
Chapter 9 Project cash flows 31
Project evaluation 31
Sunk cost 31
Opportunity cost 31
Side effects (erosion) 31
Project operating cash flow 31
Incremental cash flows 32
Chapter 12 Risk & Return 32
Risk & return 32
1
, What is risk 32
Individual securities 32
Types of risk 33
Capital asset pricing model & beta 33
Risk premium 33
Chapter 13 Cost of capital 34
Cost of capital: A starting point 34
The weighted average cost of capital (WACC) 34
Cost of each component sources of capital 34
1. Debt component (Rd): 34
2. Preferred stock (PS) component: 35
3. Equity component: 35
Cost of equity component 35
Internal vs external equity 35
Flotation cost 35
Chapter 15 Financial leverage and capital structure 36
How should a firm go about choosing its debt-equity ratio? 36
The effects of financial leverage 36
Different theories of capital structure 36
1 Modigliani & Miller on Optimal Capital Structure 36
Proposition 1 with no tax 36
Proposition 1 with taxes 38
Proposition 2 with tax 38
2 The static theory of capital structure 39
3 The pecking order hypothesis 40
Chapter 16 Dividends & dividend policy 41
Different types of dividends 41
Does dividend policy matter? 42
Real world Factors affecting dividend payouts 42
Share repurchases, an alternative to cash dividends 42
Cash dividends vs repurchase 42
Real world considerations 43
Stock dividend & stock splits 43
Chapter 17 Short-term financial planning 44
Cash management vs liquidity management 44
Reasons for holding cash 44
Target cash balance 45
The BAT model 45
Cash discounts 46
Chapter 20 Financial risk management: forwards, futures & swaps 47
Unsystematic vs systematic risk 47
Unsystematic risks 47
2
, Systematic risk 47
The risk profile of a seller 47
Hedging & Price volatility 48
Hedging with forward contracts 48
The basics 48
Example for IMPORTERS - advantages for the forward contract 48
Example for exporters - disadvantage for the forward contract 49
Future contracts 49
Future market hedge 50
Swap contracts 50
Example of an interest rate swap 50
Chapter 21 Hedging with options: calls, puts & Intrinsic value 51
Hedging with option contracts 51
Profit & loss for the BUYER 51
Profits from call options 52
Options: market speculation 52
Profits from put options 52
Profit & loss for the writer of a put option on X 53
Value (premium) of a call option 53
How about put option-> 54
An example of intrinsic value of call options 54
Valuing options 54
Black-scholes option pricing model 54
3
