This chapter introduced you to some of the basic ideas in corporate finance: Corporate finance has three main areas of concern: Capital budgeting: What long-term investments should the firm take? Capital structure: Where will the firm get the long-term financing to pay for its investments? In other words, what mixture of debt and equity should the firm use to fund operations? Working capital management: How should the firm manage its everyday financial activities?
The goal of financial management in a for-profit business is to make decisions that increase the value of the stock or, more generally, increase the market value of the equity. The corporate form of organization is superior to other forms when it comes to raising money and transferring ownership interests, but it has the significant disadvantage of double taxation. There is the possibility of conflicts between stockholders and management in a large corporation. We called these conflicts agency problems and discussed how they might be controlled and reduced. The advantages of the corporate form are enhanced by the existence of financial markets. Financial markets function as both primary and secondary markets for corporate securities and can be organized as either dealer or auction markets.
Of the topics we've discussed thus far, the most important is the goal of financial management: maximizing the value of the stock. Throughout the text, we will be analyzing many different financial decisions, but we will always ask the same question: How does the decision under consideration affect the value of the stock? |
