Banking and fi nance
Chapter one: Goals and governance of the corporation
1.1 investment and financing decisions
key investments of FedEx (video)
- Location
- Transportation
Cap-ex= capital expenditure (Capital expenditures are long-term investments, meaning the assets purchased
have a useful life of one year or more. Types of capital expenditures can include purchases of property,
equipment, land, computers, furniture, and software.)
Investment decisions
- Capital expenditure or capital budgeting decisions spend money
- Real assets = assets used to produce goods and services
- Tangible or intangible
- Long-term consequences or short-term pay-off
- Billion USD/EUR or relatively small
- Success story or a complete disaster
Financial decisions
- Decisions on the sources and the amount of financing = raise money
- Issuance of financial assets to finance investment in real assets
- Capital structure decision: debt financing vs equity financing.
- Variety of financial assets: stocks, loans, bonds, …
Debt investor= people who loan you money
Equity investor= purchase shares of a company with the expectation that they'll rise in value in the form of
capital gains, and/or generate capital dividends.
Quiz
What does market cap mean?
Number of shares outstanding of a company times the share price
Do you think Microsoft's market value is mainly driven by its investment or financing decisions?
Both are important but it’s mainly driven by the investments
Which company currently has the biggest market cap?
1
, Apple
1.2 What is a corporation. (read book ch)
Corporation= is a distinct, permanent legal entity.
A corporation’s owners are called shareholders or stockholders.
A corporation is legally distinct from the shareholders. Therefore, the shareholders have limited liability and
cannot be held personally responsible for the corporation’s debts. (if you’ve invested a $100 you can only lose
a $100 when the company is in debt)
Corporation No corporation
• Distinct legal entity • N/A
• Articles of incorporation • N/A
• Owned by shareholders • N/A
• Indirect ownership of financial assets • Direct ownership of real assets
• Limited liability, no recourse • Personal liability, recourse
• Permanent • Finite
• Resident of the country • Resident of the country
• No voting power • Voting power
Both can enter into contracts, borrow or lend money and sue or be sued
Articles of incorporation= which set out the purpose of the business and how it is to be financed, managed,
and governed. These articles must conform to the laws of the state in which the business is incorporated
Separation of ownership and control:
- Insures permanence.
- But can create conflict of interest.
1.3 Who is the financial manager?
Chief financial officer (CFO)
- Financial policy
- Corporate planning
2
,Role of the financial manager (look at book p42)
1.4 Goals of the corporation
The investment trade-off
See slide 35 & 36
Minimum rate of return= hurdle rate = opportunity cost of capital
1.5 Agency Problems, Executive Compensation, and Corporate Governance
Agency problem= Managers are agents for stockholders and are tempted to act in their own interests rather
than maximizing value.
Agency cost= Value lost from agency problems or from the cost of mitigating agency problems.
Sole proprietors (owner=manager) versus corporation structure (owner≠manager)
Owner: maximize shareholder value, personal wealth = value of the business
Manager: maximize job security and power
Because managers act as agents of the owners (it is not their own money) and may be tempted to act in their
own interest, these actions are called agency problems
The agency cost is the value lost as a result of such agency problems
Agency problems can be avoided by aligning the various stakeholders’ interest:
Internal controls and decision-making procedures
Executive compensation schemes
Corporate governance
3
, Executive compensation= The compensation packages of top executives.
Corporate governance= The laws, regulations, institutions, and corporate practices that protect shareholders
and other investors.
Elements of corporate governance:
Legal requirements to prohibit insider trading for example
Board of Directors approves large (financial) decisions + independent seats (~SOX 2002 in US)
Activist shareholders in public companies, blockholders, Wall Street Walk
Takeovers endanger current management, happen when blockholders loose interest and sell shares
Information and transparency for investors
1.6 The Ethics of Maximizing Value
Chapter two: Financial markets and institutions
2.1 The importance of financial markets and institutions
The financial environment has two segments
1) Financial markets: he principal function of financial institutions is to collect funds from the investors
and direct the funds to various financial services providers in search for those funds.
the stock market, the bond market, forex, commodities, and the real estate market
Primary market= Market for the sale of new securities by corporations.
Secondary market= Market in which previously issued securities are traded among investors.
Fixed-income market= Market for debt securities.
Capital markets= Markets for long-term financing.
Money market= Market for short-term financing (less than one year).
2) Financial institutions: he principal function of financial institutions is to collect funds from the investors
and direct the funds to various financial services providers in search for those funds
( 3) Financial intermediaries : An organization that raises money from investors and provides financing for
individuals, corporations, or other organizations
Mutual fund= An investment company that pools the savings of many investors and invests in a
portfolio of securities
Hedge fund= Private investment fund that pursues complex, high-risk investment strategies.
Pension funds= A fund set up, funded, and managed by the employer to provide the assets necessary
to pay promised retirement benefits to employees.
4
Chapter one: Goals and governance of the corporation
1.1 investment and financing decisions
key investments of FedEx (video)
- Location
- Transportation
Cap-ex= capital expenditure (Capital expenditures are long-term investments, meaning the assets purchased
have a useful life of one year or more. Types of capital expenditures can include purchases of property,
equipment, land, computers, furniture, and software.)
Investment decisions
- Capital expenditure or capital budgeting decisions spend money
- Real assets = assets used to produce goods and services
- Tangible or intangible
- Long-term consequences or short-term pay-off
- Billion USD/EUR or relatively small
- Success story or a complete disaster
Financial decisions
- Decisions on the sources and the amount of financing = raise money
- Issuance of financial assets to finance investment in real assets
- Capital structure decision: debt financing vs equity financing.
- Variety of financial assets: stocks, loans, bonds, …
Debt investor= people who loan you money
Equity investor= purchase shares of a company with the expectation that they'll rise in value in the form of
capital gains, and/or generate capital dividends.
Quiz
What does market cap mean?
Number of shares outstanding of a company times the share price
Do you think Microsoft's market value is mainly driven by its investment or financing decisions?
Both are important but it’s mainly driven by the investments
Which company currently has the biggest market cap?
1
, Apple
1.2 What is a corporation. (read book ch)
Corporation= is a distinct, permanent legal entity.
A corporation’s owners are called shareholders or stockholders.
A corporation is legally distinct from the shareholders. Therefore, the shareholders have limited liability and
cannot be held personally responsible for the corporation’s debts. (if you’ve invested a $100 you can only lose
a $100 when the company is in debt)
Corporation No corporation
• Distinct legal entity • N/A
• Articles of incorporation • N/A
• Owned by shareholders • N/A
• Indirect ownership of financial assets • Direct ownership of real assets
• Limited liability, no recourse • Personal liability, recourse
• Permanent • Finite
• Resident of the country • Resident of the country
• No voting power • Voting power
Both can enter into contracts, borrow or lend money and sue or be sued
Articles of incorporation= which set out the purpose of the business and how it is to be financed, managed,
and governed. These articles must conform to the laws of the state in which the business is incorporated
Separation of ownership and control:
- Insures permanence.
- But can create conflict of interest.
1.3 Who is the financial manager?
Chief financial officer (CFO)
- Financial policy
- Corporate planning
2
,Role of the financial manager (look at book p42)
1.4 Goals of the corporation
The investment trade-off
See slide 35 & 36
Minimum rate of return= hurdle rate = opportunity cost of capital
1.5 Agency Problems, Executive Compensation, and Corporate Governance
Agency problem= Managers are agents for stockholders and are tempted to act in their own interests rather
than maximizing value.
Agency cost= Value lost from agency problems or from the cost of mitigating agency problems.
Sole proprietors (owner=manager) versus corporation structure (owner≠manager)
Owner: maximize shareholder value, personal wealth = value of the business
Manager: maximize job security and power
Because managers act as agents of the owners (it is not their own money) and may be tempted to act in their
own interest, these actions are called agency problems
The agency cost is the value lost as a result of such agency problems
Agency problems can be avoided by aligning the various stakeholders’ interest:
Internal controls and decision-making procedures
Executive compensation schemes
Corporate governance
3
, Executive compensation= The compensation packages of top executives.
Corporate governance= The laws, regulations, institutions, and corporate practices that protect shareholders
and other investors.
Elements of corporate governance:
Legal requirements to prohibit insider trading for example
Board of Directors approves large (financial) decisions + independent seats (~SOX 2002 in US)
Activist shareholders in public companies, blockholders, Wall Street Walk
Takeovers endanger current management, happen when blockholders loose interest and sell shares
Information and transparency for investors
1.6 The Ethics of Maximizing Value
Chapter two: Financial markets and institutions
2.1 The importance of financial markets and institutions
The financial environment has two segments
1) Financial markets: he principal function of financial institutions is to collect funds from the investors
and direct the funds to various financial services providers in search for those funds.
the stock market, the bond market, forex, commodities, and the real estate market
Primary market= Market for the sale of new securities by corporations.
Secondary market= Market in which previously issued securities are traded among investors.
Fixed-income market= Market for debt securities.
Capital markets= Markets for long-term financing.
Money market= Market for short-term financing (less than one year).
2) Financial institutions: he principal function of financial institutions is to collect funds from the investors
and direct the funds to various financial services providers in search for those funds
( 3) Financial intermediaries : An organization that raises money from investors and provides financing for
individuals, corporations, or other organizations
Mutual fund= An investment company that pools the savings of many investors and invests in a
portfolio of securities
Hedge fund= Private investment fund that pursues complex, high-risk investment strategies.
Pension funds= A fund set up, funded, and managed by the employer to provide the assets necessary
to pay promised retirement benefits to employees.
4
