Corporate Finance by chenmeixiu


									          Introduction to Corporate Finance

                       Aswath Damodaran

                   Stern School of Business

Aswath Damodaran                              1
                       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.

Aswath Damodaran                                                                       2
              The Three Major Decisions in Corporate

             The Allocation decision
               • Where do you invest the scarce resources of your business?
               • What makes for a good investment?
             The Financing decision
               • Where do you raise the funds for these investments?
               • Generically, what mix of owner’s money (equity) or borrowed
                 money(debt) do you use?
             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?

Aswath Damodaran                                                                           3
           The Traditional Accounting Balance Sheet

                                                     The Balance Sheet
                                      Assets                                        Liabilities
                                                                      Current        Short-term liabilities of the firm
           Long Lived Real Ass ets           Fixed Ass ets            Liabilties
            Short-lived As sets              Current Assets           Debt             Debt obligations of firm

           Investments in securities &       Financ ial Investments   Other
           as sets of other firms                                     Liabilities      Other long-term obligations

           Ass ets w hich are not phys ic al, Intangible As sets
           like patents & trademarks                                  Equity           Equity investment in firm

Aswath Damodaran                                                                                                          4
                       The Financial View of the Firm

                                    Assets                             Liabilities
           Existing Investments                                         Fixed Claim on cas h flows
           Generate cas hflow s today      Ass ets in Place   Debt      Little or No role in management
           Includes long lived (fixed) and                              Fixed Maturity
                  short-lived(working                                   Tax Deductible
                  capital) ass ets

           Expected Value that will be     Grow th As sets    Equity    Res idual Claim on cas h flow s
           created by future investments                                Significant Role in management
                                                                        Perpetual Lives

Aswath Damodaran                                                                                          5
               First Principles of Corporate Finance

             Invest in projects that yield a return greater than the minimum
              acceptable hurdle rate.
               • The hurdle rate should be higher for riskier projects and reflect the
                 financing mix used - owners’ funds (equity) or borrowed money (debt)
               • Returns on projects should be measured based on cash flows generated
                 and the timing of these cash flows; they should also consider both positive
                 and negative side effects of these projects.
             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.
               •    The form of returns - dividends and stock buybacks - will depend upon
                   the stockholders’ characteristics.
                             Objective: Maximize the Value of the Firm
Aswath Damodaran                                                                               6

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