Introduction
Corporate Finance
Moinak Maiti, PhD
Associate Professor
Department of Finance
National Research University-Higher School of Economics
Saint Petersburg, Russia, 194100
Question
• Read the following passage: “Companies usually buy ( a ) assets.
These include both tangible assets such as ( b ) and intangible assets
such as ( c ). To pay for these assets, they sell ( d ) assets such as ( e ).
The decision about which assets to buy is usually termed the ( f ) or (
g ) decision. The decision about how to raise the money is usually
termed the ( h )decision.”
• Now fit each of the following terms into the most appropriate space:
financing, real, bonds, investment, executive airplanes, financial,
capital budgeting, brand names.
Which of the following are real assets, and which
are financial?
a. A share of stock.
b. A corporate bond
c. Atrademark.
d. Afactory.
e. Undeveloped land.
f. The balance in the firm’s checkingaccount.
g. An experienced and hardworking sales force
h. Brand Value
Question
• Who owns a corporation?
• Describe the process whereby the owners control the firm ’ s
management ?
• What is the main reason that an agency relationship exists in the
corporate form of organization?
Question
• Would the goal of maximizing the value of the stock differ for financial
management in a foreign country?
• Why or why not?
Question
• Suppose you own stock in a company. The current price per share is
$25. Another company has just announced that it wants to buy your
company and will pay $35 per share to acquire all the outstanding
stock. Your company ’ s management immediately begins fighting off
this hostile bid. Is management acting in the shareholders ’ best
interests?
• Why or why not?
Question
• Why is the goal of financial management to maximize the current
share price of the company ’ s stock? In other words, why isn ’ t the
goal to maximize the future shareprice?
What is Net Present ValueRule
• The net present value rule is the idea thatcompany managers and investors
should only invest in projects, or engage in transactions that have a positive net
present value (NPV).
• They should avoid investing in projects that have a negative net presentvalue. It
is a logical outgrowth of net present valuetheory.
• Net present value, commonly seen in capital budgeting projects, accountsfor
the time value of money(TVM).
• Time value of money is the idea that future money has less value than presently
available capital, due to the earnings potential of the present money.
• A business will use a discounted cash flow (DCF)calculation, which will reflect the
potential change in wealth from a particular project. The computation will factor
in the time value of money by discounting the projected cash flows back to the
present, using a company's weighted average cost of capital (WACC).
• A project or investment's NPV equals the present value of net cash inflows,which
the project is expected to generate, minus the initial capital required for the
project.
• During the company's decision-making process, it will use the net
present value rule to decide whether to pursue a project, suchas an
acquisition.
• If the calculated NPV of a project is negative (< 0), the project is
expected to result in a net loss for the company. As a result, and
according to the rule, the company should not pursue the project.
• If a project's NPV is positive (> 0), the company can expect a profit
and should consider moving forward with the investment.
• If a project's NPV is neutral (= 0), the project is not expected to result
in any significant gain or loss for the company. With a neutral NPV,
management uses non-monetary factors, such as goodwill, to decide
on the investment.
Thank You
Contact me: mmaiti@hse.ru