Introduction
MICHAEL W. MAIER
MICHAEL.MAIER@EURUNI.EDU
www.euruni.edu
Course Description
•
This course looks at the big picture issues related to corporate
finance including capital structure, dividend policy and the cost of
financing.
•
Topics that the course also examines are how corporations issue
securities, leasing, mergers and acquisitions and the concept of
financial distress. Students also discuss the most important goal of
the firm: maximize shareholder’s value.
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Course Objectives
•
•
•
•
•
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Appreciate and be able to evaluate decisions relating to all aspects
of financing a business.
Examine the theory and practice of financing a firm using debt and
equity.
Appreciate the arguments for higher and lower dividend payout
ratios.
Enable to assess the benefit of leasing versus purchase of assets.
Generate awareness for the reasons for mergers and acquisitions.
Explain what financial distress is.
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Learning Outcomes
On successful completion of this course, students will be able to:
• Demonstrate a deep understanding of the theory and practices of
financing a firm and its capital structure.
•
Evaluate the financing risk that may result from the chosen debt
ratio.
•
Critically evaluate the dividend payout ratio.
•
Describe and analyze the trade-off between paying dividends and
retaining the profits within the company.
•
Explain the purpose and procedure related to stock repurchases.
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Learning Outcomes
•
Evaluate and advice on a firm going from private to a public
company.
•
Discuss and analyze the benefits of leasing versus ownership of
assets.
•
Analyze the concepts underlying the firm’s cost of capital (WACC).
•
Discuss the forms of acquisition.
•
Critically evaluate what is financial distress.
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Course Content
Unit 1
An Overview of Corporate Financing
• What is corporate finance?
• The role of financial manager
• Goal of the corporation
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Course Content
Unit 2
Capital Structure
• Debt financing
• Equity financing
• Planning the financing mix
• Capital structure theory: Modigliani and Miller
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Course Content
Unit 3
Dividend and Payout Policy
• How does the firm decide on dividend and payout policy?
• Does the firm’s dividend policy affect the company’s stock price?
• The dividend decision in practice and alternative policies
• Dividend payment procedure
• Stock dividends and stock splits
• Stock repurchase
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Course Content
Unit 4
Issuing Shares
• Why going public?
• The public issue
• IPO procedures
• Primary and secondary markets
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Course Content
Unit 5
Leasing Characteristics
• Leasing characteristics
• Why lease?
• NPV analysis of the lease or buy decision
• Does leasing ever pay?
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Course Content
Unit 6
Cost of Capital
• The cost of capital: key definitions and concepts
• Determining the cost of individual sources of capital
• Weighted average cost of capital compared to return on investment
• Discount rates in practice - Stories from the real world
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Course Content
Unit 7
Mergers and Acquisition
• The basic forms of acquisitions
• The sensible motives for mergers
• Sources of synergy
• Friendly versus hostile takeovers
• Do mergers add value?
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Course Content
Unit 8
Financial Distress
• What is financial distress
• What happens in financial distress
• Bankruptcy liquidation or reorganization
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Course specifications
•
3 ECTS Course
•
24 Hours
Grading
• Formative evaluations in preparation for midterm and final
assessments as determined by the lecturer
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Course specifications
Summative Evaluation Assignments
• Mid-Term Exam
40%
• Final Exam
60%
•
•
•
•
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The exams will provide exercises, short essay questions
for the students.
There will be no multiple choice nor true/false questions.
The student is invited to developed answers based on
the theories studied in class.
The structure of the arguments must be clear and logical.
The Midterm and Final Exams both consist of an turnit-in
written exam testing students’ understanding, knowledge and
application of the materials and information covered.
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Bibliography
Required Readings:
•
Arthur J. Keown, John D. Martin, J. William Petty
Foundations of Finance, Global Edition,
Edition: 10th., Pearson
•
Brealey, Myers, Allen (2020) Principles of corporate finance,
McGrawHill
•
Corporate Finance, Hillier Ross et al, 4th European edition, McGraw
Hill 2021
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Corporate Finance
Chapter 1
An Introduction to
Financial Management
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Foundations of Finance
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How everything is connected
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Course Content
UNIT 1: Objective of Corporation
•
What is corporate finance?
•
The role of financial manager
•
Goal of the corporation
•
Debt financing
•
Equity financing
•
•
Debt to equity ratio
The legal forms of business organization
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UNIT 1: Objective of Corporation
What is corporate finance?
• Corporate finance deals with all financial activities that are required
to operate a corporation.
• In a small business, the entrepreneur may generally handle the finance function
himself. But in large corporations, there would be a finance department headed by a
Chief Finance Officer (CFO) with a team of finance professionals, who would manage the
finances of the company.
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UNIT 1: Objective of Corporation
What is corporate finance?
.
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What is corporate finance?
• A key goal of corporate finance is to enhance the shareholder value.
The CFO’s job is to ensure that funds needed to run the business are available.
So the ultimate purpose of the corporate finance is to maximize the value
of a business through planning and implementation of resourches, while
balancing risk and profitability.
• Corporate finance also deals with mergers, acquisitions and related activities that
affect the finances of a company. Project management, taxation, cash flow
management are some of the other functions of corporate finance in a business.
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What is corporate finance?
So, why is corporate finance so important?
Main reasons:
The goals of an organization, be it short-term or long-term need
.
finance.
Whether it is profitability, increasing customer base; finance
is required to achieve goals.
It helps to minimize the cost of capital.
It helps to raise the capital needed to run the business.
Financing is needed for organizations to carry out research and
development.
Finance is needed for expansion of a business and for diversification.
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What is corporate finance?
Introduction to Financial Management
• The Goal of the Firm
- Discuss “maximization of shareholders wealth”
• Five Principles that form the Foundations of Finance
- Cash flows is what matters
- Money has time value
- Risk requires reward
- Market price is generally right
- Conflict of interest cause agency problems
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Learning Objectives
1.1 Identify the goal of the firm.
1.2 Understand the basic principles of finance, their importance,
and the importance of ethics and trust.
1.3 Describe the role of finance in business.
1.4 Distinguish between the different legal forms of business
organization.
1.5 Explain what has led to the era of the multinational
corporation.
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The Goal of the Corporation
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The Goal of the Corporation
• What is a corporation? A business created
as a distinct legal entity composed of one
or more individuals or entities.
✓Separation of control (shareholders)
and management (professionals).
✓Ownership can be easily transferred.
✓Limited liability.
✓Double taxation.
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The Goal of the Corporation
• The goal of the firm is to create value for the firm’s
owners (that is, its shareholders). Thus the goal of
the firm is to “maximize shareholder wealth” by
maximizing the price of the existing common stock.
• Good financial decisions will increase stock price
and poor financial decisions will lead to a decline in
stock price.
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The Goal of the Corporation
• Besides wealth and dividend maximization objectives, managers
may pursue other objectives such as higher executive salaries and
employee benefits.
• Social responsibility: such as welfare of the employees, customer
satisfaction and the community at large.
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Part of Coca-Cola’s Vision
• “Maximizing return to shareowners while being
mindful of our overall responsibilities.”
— http://www.thecoca-colacompany.com/ourcompany/mission_vision_values.html
(retrieved March 13, 2007)
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Benefits of Maximizing Shareholder Wealth
• Good corporate decisions are those that
create wealth for the shareholder.
• Society benefits as scarce resources are
directed to the most profitable use by
businesses competing to create wealth.
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Why is Profit Maximization not the
appropriate goal?
• Profit maximization goal is unclear about the time
frame over which profits are to be measured.
• It is easy to manipulate the profits through various
accounting policies.
• Profit maximization goal ignores risk and timing of
cash flows.
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Five Principles that Form the
Foundations of Finance
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The Principles
of Financial Management
Five Principles that Form the
Foundations of Finance
“…although it is not necessary to understand
finance in order to understand these principles, it
is necessary to understand these principles in
order to understand finance.”
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Principle 1: Cash Flow Is What Matters
• We must determine incremental or marginal cash
flows when making financial decisions.
• Incremental cash flow is the difference between the
projected cash flows if the project is selected, versus
what they will be, if the project is not selected.
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Principle 1: Cash Flow Is What Matters
• Accounting profits are not equal to cash flows.
• It is possible for a firm to generate accounting profits but
not have cash or to generate cash flows but not report
accounting profits in the books.
• Cash flow, and not profits, drive the value of a business.
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Principle 2: Money Has a Time Value
• A dollar received today is worth more than a dollar
received in the future.
• Since we can earn interest on money received today,
it is better to receive money sooner rather than later.
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Principle 3: Risk Requires a Reward
• Investors will not take on additional risk unless they expect to
be compensated with additional reward or return.
• Investors expect to be compensated for “delaying
consumption’’ and “taking on risk’’.
• Thus, investors expect a return when they deposit their
savings in a bank (ex. delayed consumption) and they expect
to earn a relatively higher rate of return on stocks compared
to a bank savings account (ex. taking on risk).
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Figure 1-1 The Risk-Return Trade-off
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Principle 4:
Market Prices Are
Generally Right
• In an efficient market, the market prices of all traded
assets (such as stocks and bonds) fully reflect all
available information at any instant in time.
• Thus stock prices are a useful indicator of the value of
the firm. Price changes reflect changes in expected
future cash flows. Good decisions will tend to increase in
stock price and vice versa.
• Note there are inefficiencies in the market that may
distort the market prices from value of assets. Such
inefficiencies are often caused by behavioral biases.
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Principle 5:
Conflicts of Interest Cause Agency Problems
• The separation of management and the ownership
of the firm creates an agency problem.
• Managers may make decisions that are not consistent
with the goal of maximizing shareholder wealth.
• Agency conflict is reduced through
- monitoring (ex. annual reports)
- compensation schemes (ex. stock options),
- market mechanisms (ex. takeovers)
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Ethics and Trust in Business
• Ethical behavior is doing the right thing! … but what is
the right thing?
• Ethical dilemma -- Each person has his or her own set
of values, which forms the basis for personal
judgments about what is the right thing.
• Sound ethical standards are important for business
and personal success. Unethical decisions can
destroy shareholder wealth (ex. Enron scandal).
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The Role of Finance in Business
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The Role of Finance in Business (1 of 2)
Three basic issues addressed by the study of finance:
• What long-term investments should the firm
undertake? (Capital budgeting decision)
• How should the firm raise money to fund these
investments? (Capital structure decision)
• How to manage cash flows arising from day-to-day
operations? (Working capital decision)
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The Role of Finance in Business (2 of 2)
• Knowledge of financial tools is relevant for decision
making in all areas of business (be it marketing,
production etc.) and also in managing personal finances.
• Decisions involve an element of time and uncertainty …
financial tools help adjust for time and risk.
• Decisions taken in business should be financially viable
… financial tools help determine the financial viability of
decisions.
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Role of Financial Manager
in a Corporation
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Who is The Financial Manager?
Chief Financial Officer
Treasurer
Controller
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Role of The Financial Manager
• The financial manager or also called
the chief financial officer (CFO), serves
under the firm’s chief executive officer
(CEO) and is responsible for overseeing
financial planning, strategic planning,
and controlling the firm’s cash flow.
• The
treasurer
oversees
cash
management, credit management,
capital expenditures and financial
planning.
• The controller oversees taxes, cost
accounting, financial accounting and
data processing.
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Role of The Financial Manager
(2)
Firm's
operations
(1)
Financial
manager
Financial
markets
(1) Cash raised from investors (external finance)
(2) Cash invested in firm
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Role of The Financial Manager
(2)
(1)
Financial
manager
Firm's
operations
(4a)
Financial
markets
(4b)
(3)
(1) Cash raised from investors (external finance)
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested (internal finance)
(4b) Cash returned to investors
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Role of The Financial Manager
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Ownership vs. Management
Different Objectives
èAgency costs
Different Information
èOften exacerbates
agency costs or
leads to other costs
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Financial Markets
Primary
Raising
and
trading
capital
Markets
OTC
Markets
Secondary
Markets
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Financial Institutions
Operating company
Obligations
Funds
Financial intermediaries
Banks
Insurance Cos.
Brokerage Firms
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Financial Institutions
Financial intermediaries
Obligations
Funds
Investors
Depositors
Policyholders
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The company and its key
dependencies: Theory
Managers
Protect
lenders
Bondholders
Maximize
wealth,
can get fired
Stockholders
Efficiently use
ressources,
Taxes,
positive ext
Full info,
opt allocation
of capital
Society
Capital
Markets
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The company and its key
dependencies: Practice
Managers
Hurt by
stockholders
actions
(RJR Nabisco)
Bondholders
Agency
costs
Stockholders
Social,
environmental,
animal welfare
costs
Society
Info
asymmetries
Capital
Markets
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