Because learning changes everything.®
Financial Management
Lecture 1
Yongjae Kwon
(Kookmin University)
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Course Information
Because learning changes everything.®
• Instructor’s name: Yongjae Kwon
• Office: Room #404 in Business Building
• Office Phone Number: 02-910-4530
• Office Hour: Monday 13:30 – 14:30 or by appointment
• E-mail: yjkwon@kookmin.ac.kr
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Course Description
Because learning changes everything.®
• Financial Management is a basic course to
understand the goal and concept of investment and
financing. In this course, students study time value of
money, valuation theories for equity and fixed income
securities, and capital budgeting theories.
• They also learn many theories on financial
management such as portfolio theory, capital asset
pricing theories, the cost of capitals, capital structure
theory and dividend theory.
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Textbook
Because learning changes everything.®
• Corporate Finance (Ross, Westerfield, Jaffe & Jordan,
2022)
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Class Schedule
Because learning changes everything.®
Date
(MM/DD)
Textbook
Chapter
Content
03/02, 03/07
1
Introduction to Corporate Finance
03/09, 03/14
2
Financial Statements and Cash Flow
03/16, 03/21
3
Financial Statements Analysis and Financial Models
03/23, 03/28
4
Discounted Cash Flow Valuation
03/30, 04/04
5
Net Present Value and Other Investment Rules
04/06, 04/11
6
Making Capital Investment Decisions
04/13, 04/18
7
Risk Analysis, Real Options, and Capital Budgeting
04/20, 04/25
N/A
Midterm Exam
6
Class Schedule
Because learning changes everything.®
Date
(MM/DD)
Textbook
Chapter
Content
04/27, 05/02
8
Interest Rates and Bond Valuation
05/04, 05/09
9
Stock Valuation
05/11, 05/16
10
Lessons from Market History
05/18, 05/23
11
Return, Risk, and the Capital Asset Pricing Model
05/25, 05/30
12
An Alternative View of Risk and Return
06/01, 06/08
13
Risk, Cost of Capital, and Valuation
06/13, 06/15
N/A
Final Exam
7
Evaluation
Because learning changes everything.®
Percentage
Midterm
30%
Final Exam
30%
Quiz
10%
Assignments
20%
Attendance
10%
Total
100%
Because learning changes everything.®
Corporate Finance
Thirteenth Edition
Stephen A. Ross / Randolph W. Westerfield / Jeffrey F. Jaffe /
Bradford D. Jordan
Chapter 1
Introduction to Corporate Finance
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Key Concepts and Skills
• Know the basic types of financial management
decisions and the role of the financial manager
• Know the financial implications of the various forms of
business organization
• Know the goal of the financial manager
• Understand the conflicts of interest that can arise
between owners and managers
• Understand the various regulations that firms face
© McGraw Hill, LLC
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Chapter Outline
1.1 What is Corporate Finance?
1.2 The Corporate Firm
1.3 The Importance of Cash Flows
1.4 The Goal of Financial Management
1.5 The Agency Problem and Control of the Corporation
1.6 Regulation
© McGraw Hill, LLC
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1.1 What Is Corporate Finance?
Corporate finance addresses the following three
questions:
1. In what long-lived assets should the firm invest?
(Capital Budgeting)
2. How can the firm raise cash for required capital
expenditures? (Capital Structure)
3. How should short-term operating cash flows be
managed? (Short-Term Asset Management)
© McGraw Hill, LLC
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The Balance Sheet Model of the Firm
Total Value of Assets:
Current Assets
Fixed Assets
1. Tangible
2. Intangible
© McGraw Hill, LLC
Total Value of the Firm to
Investors:
Current Liabilities
Long-Term Debt
Shareholders’ Equity
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The Capital Budgeting Decision
Current Assets
Current Liabilities
Fixed Assets
Long-Term Debt
1. Tangible
Shareholders’ Equity
2. Intangible
In what long-term assets
should the firm invest?
© McGraw Hill, LLC
13
The Capital Structure Decision
Current Assets
Current Liabilities
Fixed Assets
Long-Term Debt
1. Tangible
Shareholders’ Equity
2. Intangible
How should the firm raise
funds for the selected
investments?
© McGraw Hill, LLC
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Short-Term Asset Management
© McGraw Hill, LLC
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The Financial Manager
The financial manager’s primary goal is to increase the value
of the firm by:
1. Selecting value-creating projects
2. Making smart financing decisions
In large firms, the finance activity is associated with a top
officer of the firm and some lesser officers.
Top officer: Chief Financial Officer (CFO)
The treasurer and the controller report to the CFO.
• Treasurer: handling cash flows, managing capital expenditure
decisions, and making financial plans
• Controller: handling the accounting function, which include
taxes, cost and financial accounting, and information systems
© McGraw Hill, LLC
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Hypothetical Organization Chart
© McGraw Hill, LLC
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1.2 The Corporate Firm
A basic problem of the firm is how to raise cash.
The corporate form of business is the standard method for
solving the problems encountered in raising large amounts of
cash.
However, businesses can take other forms.
© McGraw Hill, LLC
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Forms of Business Organization
The Sole Proprietorship
The Partnership
• General Partnership
• Limited Partnership
The Corporation
© McGraw Hill, LLC
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Forms of Business Organization
The Sole Proprietorship
• A business owned by one person
• The simplest type of business and the least regulated
form of organization
Disadvantages
Advantages
• Easiest to start
• Limited to life of owner
• Least regulated
• Equity capital limited to
owner’s personal
wealth
• Single owner keeps
all of the profits
• Taxed once as
personal income
© McGraw Hill, LLC
• Unlimited liability
• Difficult to sell
ownership interest
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Forms of Business Organization
The Partnership
• General Partnership
• All partners agree to provide some fraction of the work and
cash and to share the profits and losses.
• Each partner is liable for all of the debts of the partnership.
• A partnership agreement specifies the nature of the
arrangement.
• Limited Partnership
• Permitting liability of some of the partners to be limited to the
amount of cash each has contributed to the partnership
• Requiring that at least one partner be a general partner and the
limited partners do not participate in managing the business
© McGraw Hill, LLC
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Forms of Business Organization
The Corporation
• ‘Legal’ person
• Has many of the rights, duties, and privileges of an
actual person
Disadvantages
Advantages
• Separation of ownership
• Limited liability
and management
• Unlimited life
• Separation of ownership • Double taxation (income
taxed at the corporate
and management
rate and then dividends
• Transfer of ownership is
taxed at personal rate,
easy
while dividends paid are
not tax deductible)
• Easier to raise capital
© McGraw Hill, LLC
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A Comparison of Corporations and
Partnerships
Corporation
Partnership
Liquidity
Shares can be
easily exchanged
Subject to substantial restrictions
Voting rights
Usually each share
gets one vote
General partner is in charge while
limited partners may have some voting
rights.
Taxation
Double
Partners pay personal taxes on
partnership profits.
Reinvestment
and dividend
payout
Broad latitude
All net cash flow is distributed to
partners.
Liability
Limited liability
General partners may have unlimited
liability while limited partners enjoy
limited liability.
Continuity
Perpetual life
Limited life
© McGraw Hill, LLC
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