Corporate Finance is the study of financial decision-making in business organizations. (Note that the term "business organization" refers to small firms as well as large; sole proprietorships and partnerships as well as corporations.)
Investments
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concerns the valuation and management of portfolios of financial assets (i.e., stocks and bonds
The Financial Institutions field focuses on financial issues faced by commercial banks, insurance companies, and investment banks, among others
International Finance addresses such topics as exchange rates, international investment, and international corporate finance.
Why Study Finance? Regardless of your major field of study, you will be impacted by the actions of financial decision-makers, and it is likely that you will, at some point in your career, be required to make financial decisions yourself. As such, a basic knowledge of financial principles serves as good preparation for your future position and will be useful to you as you enter the workplace.
Business Finance and the Financial Manager
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What is Business Finance? Financial decision-makers are faced with the following types of decisions:
What long-term investments should be made? These are capital budgeting decisions.
What is the best way to raise funds in order to finance these investments? These are capital structure decisions.
How should the firm manage its short-term assets and liabilities? These are working capital management decisions.
Managers are those who run the business organization on a day-to-day basis on behalf of the firm's owners. In sole proprietorships and partnerships, the owners and the managers are generally the same people. In large corporations, the managers and those holding the majority of the outstanding shares of stock are generally different people.
Financial Management Decisions
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Another way to categorize financial management decisions is whether they are investment or financing decisions, and whether they impact the top half, or the bottom half, of the balance sheet.
Capital Budgeting
Capital Structure
Working Capital Management: The management of YabbaDabba.com is investigating the purchase of several different machines to use in their CD manufacturing business. This is an example of a _____ decision. CONCEPT CHECK
Profit Maximization is not an appropriate goal for financialdecision-makers because the definition of "profit" is unclear, and because it doesn't tell us anything about the appropriate trade-off between current and future profits.
The Goal of Financial Management in a Corporation is to maximize the current value per share of the existing stock.
A More General Financial Management Goal Since corporations are owned by their shareholders, maximizing the value of the firm's stock is equivalent to maximizing the market value of the owners' equity. Stated this way, our goal can be applied to any form of business organization. The duties of managers to shareholders and society is beautifully described by the late Chairman and CEO of Coca-Cola, Roberto Goizueta
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The Agency Problem and Control of the Corporation
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Agency Relationships exists whenever one person or entity (the principal) hires another individual or entity (the agent) to represent the interests of the former.
Management Goals The goals of the firm's managers sometimes differ from the goals of the owners. For example, managers may obtain prestige among their peers by increasing firm size, regardless of whether it is warranted or even desirable, from the viewpoint of the shareholders.
Do Managers Act in the Stockholders' Interests? The answer is yes - if the interests of managers are aligned with those of the shareholders. Linking managerial compensation to the performance of the firm's stock is one way of aligning the interests of shareholders and managers. At the same time, managers whose decisions result in losses to shareholders can find themselves out of work!
Stakeholders Others have an interest in the firm's decisions. These stakeholders include employees, customers, creditors, suppliers, and governmental entities. True or False: In agency terms, shareholders are principals, and managers are agents. CONCEPT CHECK
Financial Markets and the Corporation
Cash Flows to and from the Firm
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Firms are dependent (either directly or indirectly) on the financial markets for the funds necessary to make investments in current assets and in plant, property and equipment. Suppliers of capital (primarily investors and financial institutions) are dependent on financial markets as a means of acquiring and selling securities.
Primary versus Secondary Markets
Primary Markets In a primary market securities transaction, the issuing firm or government is the seller, and the buyer is typically an individual or financial institution. (Think of it this way: the sale of a brand new Jaguar XK8 from the dealer to an individual is a primary market transaction in the automobile market.
Secondary Markets A secondary market securities transaction is the sale of a security from one owner to another, without the involvement of the issuing firm. (Should you sell your Jaguar to your college roommate in order to purchase a Mercedes, the sale of the Jag is a secondary auto market transaction.
Dealer versus Auction Markets Dealer markets are markets in which the buyers and sellers for themselves. Dealer trading in long-term debt and equity instruments is sometimes called over-the-counter (OTC) trading. In auction markets, the market participants are generally acting as brokers, buying and selling on the directions of others.
Trading in Corporate Securities The Nasdaq market is a large OTC market. The New York Stock Exchange (NYSE) is the world's largest auction market, with over 3,000 companies worth over $16 trillion currently listed.
Listing Issuers must meet certain criteria for their stocks to be listed on an organized exchange. The listing requirements of each exchange differ.
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