FIN 785 – Week 1

Readings
Videos
- Intro 1
  - Course objectives
    - To five you the capacity to understand the theory and apply, in real world situations, the techniques that have been developed in finance.
    - To give you the big picture of finance so that you can understand how things fit together
    - To show you that finance is fun
  - Topics
    - Financial statements
    - Time value of money
    - Bonds and stock valuation
    - Risk and return
    - Capital budgeting
- Intro 2
  - What is finance?
    - The study or management of funds
    - Two main branches of finance
      - Investors
        Investors use stocks and bonds to finance corporations
      - Corporate finance
        Corporations use these to finance investors
        Bonds: coupons (bond interest) + face value of bond
        Stocks: dividends, capital gains (stock appreciation)
        Corporations create value through financing by selecting projects
        capital budgeting: risk of project defines cost of capital and interest returned

Cont
- Cont
  - What is corporates finance?
    - Financial activities related to running a corporation
    - Capital budgeting
      - What projects should we invest in and how much?
    - Capital Structure
      - How to raise the funds needed to the investment
        some mix of bonds/stocks/etc
    - Working capital management
      - how do we manage the day-to-day finances of the firm
  - What are investments?
    - financial activities related to investments
    - bond valuation
      - how much should i pay for a bond
    - stock valuation
      - how much is a stock worth
    - portfolio management
      - what is the optimal mix of different types of assets
    - we call these decisions investment decisions
Chapter 1
- Forms of business organization

Cont
- Cont
  - Forms of business organization
    - Proprietorship
      - Owned by one owner
      - Easy to form
      - Few regulations
      - No corporate income taxes
      - Difficult to raise capital
      - Unlimited liability
        Unless set up as LLC/LLP
      - Limited lifespan
    - Partnership
      - Owned by two or more people
      - Easy to form
      - Few regulations
      - No corporate income taxes
      - Difficult to raise capital
      - Unlimited liability
        Unless set up as LLC/LLP
      - Limited lifespan
    - Corporation
      - Owned by many shareholders
      - Complex to form
      - Many regulations
      - Subject to corporate income taxes
      - Easier to raise capital
      - Limited liability
      - Unlimited lifespan
      - Easy transfer of ownership
      - Double taxation
      - Have to file financial reports
- Creating value for investors
  - Stock prices and intrinsic value
    - In equilibrium, a stock’s price should equal its “true” or intrinsic value: present value of future cash flows
    - Intrinsic value is a long-run concept
    - To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value
    - Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run

Cont
- Stockholder-manager conflicts
  - Managers are naturally inclined to act in their own best interests (which are not always the same as the interests of stockholders)
  - The following factors affect managerial behavior:
    - Managerial compensation packages
    - Direct intervention by shareholders
    - The threat of firing
    - The threat of takeover
- Stockholder-debtholder conflicts
  - Stockholders are more likely to prefer riskier projects because they receive more of the upside if the project succeeds.
  - Bondholders receive fixed payments and are more interested in limiting risk
  - Bondholders are particularly concerned about the use of additional debt
  - Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions
- Balancing shareholder interests and society interests
Discussion
Assignment