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Introduction to Corporate Finance

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									Introduction to Corporate
                 Finance
                      Saeid Samiei

        Portsmouth Business School
General Information
   Name:           Dr.Saeid Samiei

   Office:         Richmond 1.09

   Office hours:   Wednesday, 2.00 – 4.00

   Tel:            (023) 92844017

   e-mail:         saeid.samiei@port.ac.uk

   Home Page:      http://userweb.port.ac.uk/~samieis/corf
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.
Career Paths in Corporate Finance
   Corporate finance involves problem solving. People who
    excel in this area are those who can see the big picture,
    then dig to considerable depth into particular problems.
Key Career Areas
   Treasury

   Relationship Management

   Mergers & Acquisitions

   Equity Underwriting
Personality Traits and Skill
Requirements
   Analytical & Intuition Skills

   Technical Knowledge

   Computer Skills

   Communication Skills

   Ability to Synthesize

   Initiative
Salaries
   Work Hours: 40-55/week

   Junior Financial Analyst > Starting from £25,000 to
    £35,000.

   Financial Analyst > Starting from £30,000 to £45,000.
The Three Major Decisions in
Corporate Finance
   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?
 The Balance-Sheet Model of the Firm
Total Value of Assets:   Total Firm Value to Investors:

                                         Current
                                        Liabilities
   Current Assets
                                        Long-Term
                                          Debt


    Fixed Assets
     1 Tangible                       Shareholders’
     2 Intangible                        Equity
The Balance-Sheet Model of the Firm
          The Capital Budgeting Decision
                                       Current
                                      Liabilities
 Current Assets
                                      Long-Term
                                        Debt


  Fixed Assets     What long-
                   term
   1 Tangible      investments       Shareholders’
  2 Intangible     should the           Equity
                   firm engage
                   in?
The Balance-Sheet Model of the Firm
           The Capital Structure Decision
                                         Current
                                        Liabilities
  Current Assets
                                       Long-Term
                How can the firm         Debt
                raise the money
                for the required
   Fixed Assets
                investments?
    1 Tangible                        Shareholders’
   2 Intangible                          Equity
2.1.1 Decision making in corporate
finance

                           Maximising the Value of
                                  the Firm




  The Investment                The Financing             The Dividend
     Decision                     Decision                  Decision

 Invest in projects that     Choose a Financing Mix    If there are not enough
 yield a return greater         that maximises the      investments that earn
   than the minimum            value of the projects    the hurdle rate, return
 acceptable hurdle rate      taken, and matches the    the cash to the owners
                              assets being financed
Types of financing decisions
   How much debt & equity to sell

   What types of debt & equity to sell

   When to sell debt & equity
2.1.2 Difference between investment
& finance decisions
   Variety of financing instruments
       Equities – Owner’s equity, venture capital, common stock,
        warrants, contingent value rights
       Debt – Bank debt, bonds
       Hybrid securities – Convertible debt, preferred stock, option-
        linked bonds

   Financing decisions easier to reverse
       Higher abandonment value

   Harder to make money from financing decisions
       i.e. finding financing schemes with positive NPV
Methods to create valuable financing
opportunities
   Fool investors – packaging securities to receive the
    greatest value

   Reduce costs (or increase subsidies) – i.e. minimise
    taxes, transaction costs or increase subsidies available

   Create a new security – designing specialised hybrid
    securities
The Balance Sheet
• An accountant’s snapshot of the firm’s accounting value
  at of a particular date.

                 Assets                         Liabilities
Current Assets                  Current Liabilities
 Cash & marketable securities    Accounts payable
 Accounts receivable              Short-term borrowing
 Inventories                      Other current liabilities
 Other current assets           Long-term Debt
                                Other Non-current liabilities
Investments
                                Stockholders equity
Fixed Assets                      Preferred stock
  Property, plant & equipment     Common stock
  Intangible assets               Retained earnings
                                  Treasury stock
The Income Statement

   The income statement measures performance over a
    specific period of time.

   The accounting definition of income is

            Revenue  Expenses  Income
U.S.C.C. Income Statement
                      U.S. COMPOSITE CORPORATION
                             Income Statement
                                  20X2
                              (in $ millions)


                            Total operating revenues                        $2,262
 The operations             Cost of goods sold                              - 1,655
 section of the             Selling, general, and administrative expenses     - 327
                            Depreciation                                        - 90
 income statement
                            Operating income                                  $190
 reports the firm’s         Other income                                           29
 revenues and               Earnings before interest and taxes                $219
                            Interest expense                                    - 49
 expenses from              Pretax income                                     $170
 principal                  Taxes                                               - 84
 operations                   Current: $71
                              Deferred: $13
                            Net income                                         $86
                              Retained earnings:                               $43
                              Dividends:                                       $43
U.S.C.C. Income Statement
                     U.S. COMPOSITE CORPORATION
                            Income Statement
                                 20X2
                             (in $ millions)


                           Total operating revenues                        $2,262
 The non-operating         Cost of goods sold                              - 1,655
 section of the            Selling, general, and administrative expenses     - 327
                           Depreciation                                        - 90
 income statement
                           Operating income                                  $190
 includes all              Other income                                           29
 financing costs,          Earnings before interest and taxes                $219
                           Interest expense                                    - 49
 such as interest          Pretax income                                     $170
 expense.                  Taxes                                               - 84
                             Current: $71
                             Deferred: $13
                           Net income                                         $86
                             Retained earnings:                               $43
                             Dividends:                                       $43
U.S.C.C. Income Statement
                        U.S. COMPOSITE CORPORATION
                               Income Statement
                                    20X2
                                (in $ millions)


                              Total operating revenues                        $2,262
                              Cost of goods sold                              - 1,655
                              Selling, general, and administrative expenses     - 327
                              Depreciation                                        - 90
                              Operating income                                  $190
                              Other income                                           29
                              Earnings before interest and taxes                $219
 Usually a separate           Interest expense                                    - 49
 section reports as a         Pretax income                                     $170
                              Taxes                                               - 84
 separate item the              Current: $71
 amount of taxes                Deferred: $13
 levied on income.            Net income                                         $86
                                Retained earnings:                               $43
                                Dividends:                                       $43
U.S.C.C. Income Statement
                       U.S. COMPOSITE CORPORATION
                              Income Statement
                                    20x2
                               (in $ millions)


                             Total operating revenues                        $2,262
                             Cost of goods sold                              - 1,655
                             Selling, general, and administrative expenses     - 327
                             Depreciation                                        - 90
                             Operating income                                  $190
                             Other income                                           29
                             Earnings before interest and taxes                $219
                             Interest expense                                    - 49
   Net income is the         Pretax income                                     $170
   “bottom line”.            Taxes                                               - 84
                               Current: $71
                               Deferred: $13
                             Net income                                         $86
                               Retained earnings:                               $43
                               Dividends:                                       $43
Capital Structure
 The value of the firm can be
 thought of as a pie.

 The goal of the manager is                25%50%
                                           70% 30%
 to increase the size of the               DebtDebt
                                                 Equity
 pie.
                                                75%
                                                50%
 The Capital Structure                         Equity
 decision can be viewed as
 how best to slice up a the
 pie.
 If how you slice the pie affects the size of the pie,
 then the capital structure decision matters.
The Financial Manager
To create value, the financial manager should:

1.   Try to make smart investment decisions.

2.   Try to make smart financing decisions.
Course Overview
   Session 2:      Efficient Markets

   Session 3-6:    The Capital Structure of a firm;

   Session 7-8:    The Dividend Policy;

   Session 9-10:   Valuation & Acquisitions

   Session 11:     Corporate Governance
Assessment
   Coursework - 30%

   Exam – 70%

   Coursework
       Capital Structure
       (a) What have been the benefits of the Modigliani & Miller
        theories on capital structure?
       (b) Identify and explain any weaknesses in the theories
       Deadline: 30th April

								
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