Corporate Finance

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					Introduction to
Corporate Finance
    Prem Mathew
       BA 440
What is Corporate Finance?
 Every decision that a business makes has financial implications,
   and any decision which affects the finances of a business is a
   corporate finance decision.

 Defined broadly, everything that a business does fits under the
   rubric of corporate finance.

 In this course
       We examine in-depth the decisions that a financial manager
        has to make

       We discuss basic valuation models that allow us to value a
The Three Major Decisions in
Corporate Finance
 The investment decision
       Why are managers asked to make choices amongst potential

       What makes for a good investment?
The Three Major Decisions in
Corporate Finance
 The financing decision
       Where do firms raise/acquire the funds for value-creating investments?

       What mix of owner’s money (equity) or borrowed money(debt) should
        the firm use?
The Three Major Decisions in
Corporate Finance
 The dividend decision
       How much of a firm’s funds should be reinvested in the business and
        how much should be returned to the owners?
First Principles of Corporate
 Invest in projects that yield a return greater than the minimum
   acceptable hurdle rate with adjustments for project riskiness.

 Choose a financing mix that minimizes the hurdle rate and matches the
   assets being financed.

 If there are not enough investments that earn the hurdle rate, return the
   cash to stockholders.

       These decision criteria will be consistent with the objective of the
        firm: Maximize the Value of the Firm
Am I Ever Going to Use This Stuff?
 Survey of 392 CFOs in 1998/99 about:
   Capital budgeting, capital structure decisions

 Firms covered a broad spectrum of

   “Theory and Practice of Corporate Finance:
     Evidence from the Field,” Journal of Financial
     Economics, Vol. 60 by J. Graham and C.
Am I Ever Going to Use This Stuff?
 Capital Budgeting
     How often do you use particular techniques?
        NPV - 75%

        IRR - 76%

        Payback period – 57%

     NPV and IRR more used by:
        Large firms

        Highly levered firms
Am I ever going to use this stuff?
 Capital Budgeting (contd.)
   Cost of capital
        CAPM – 74%
        Company-wide rate -60%
        Risk-adjusted rate – 51%
Am I Ever Going to Use This Stuff?
 Capital Structure
   Do companies set target debt-equity ratio?
         Strict target – 44%
         Flexible target – 37%

         Differences between small and large firms
         Book values used to determine ratios
Careers in Finance
 Commercial Banking
    Credit analyst, loan officer, branch manager
 Corporate Finance
    Treasurer, controller, credit manager, cash manager
 Financial Planning

 Investment Banking
    Trading, securities or financial analyst, M&A, securities
Useful Designations/Licenses
 Chartered Financial Analyst (CFA)
     Three levels of exams, bachelor’s degree,
      three years work experience
 Certified Financial Planner (CFP)
     Single exam, bachelor’s degree, three years
 Series 7 (Brokerage license)
     Single Exam, financial company sponsor

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