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