FINANCIAL ANALYSIS AND
FORECASTING
52-251-A2003
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 1
TRANSPARENCY ACETATES
to accompany
FUNDAMENTALS OF
CORPORATE FINANCE
Fourth Canadian Edition
Stephen A. Ross
Randolph W. Westerfield
Bradford D. Jordan
Gordon S. Roberts
Prepared by: Thomas J. Cottrell
Modified by: Carlos Vecino HEC-Montreal
Irwin/McGraw-Hill
copyright © 2002 McGraw-Hill Ryerson,Ltd.
Outline of the Text
Part I:
Part II:
Part III:
Part IV:
Part V:
Part VI:
Part VII:
Part VIII:
Part IX:
Irwin/McGraw-Hill
Overview of Corporate Finance
Financial Statements and Long-Term Financial
Planning
Valuation of Future Cash Flows
Capital Budgeting
Risk and Return
Cost of Capital and Long-Term Financial Policy
Short-Term Financial Planning and Management
Topics in Corporate Finance
Derivative Securities and Corporate Finance
copyright © 2002 McGraw-Hill Ryerson, Ltd.
Table of Contents
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Irwin/McGraw-Hill
Introduction to Corporate Finance
Financial Statements, Taxes, and Cash Flow
Working with Financial Statements
Long-Term Financial Planning and Corporate Growth
Introduction to Valuation: The Time Value of Money
Discounted Cash Flow Valuation
Interest Rates and Bond Valuation
Stock Valuation
Net Present Value and Other Investment Criteria
Making Capital Investment Decisions
Project Analysis and Evaluation
Some Lessons from Capital Market History
Return, Risk, and the Security Market Line
Cost of Capital
copyright © 2002 McGraw-Hill Ryerson, Ltd.
Table of Contents (continued)
Chapter 15
Raising Capital
Chapter 16
Financial Leverage and Capital Structure Policy
Chapter 17
Dividends and Dividend Policy
Chapter 18
Short-Term Finance and Planning
Chapter 19
Cash and Liquidity Management
Chapter 20
Credit and Inventory Management
Chapter 21
International Corporate Finance
Chapter 22
Leasing
Chapter 23
Mergers and Acquisitions
Chapter 24
Risk Management: An Introduction to Financial
Engineering
Chapter 25
Options and Corporate Securities
Irwin/McGraw-Hill
copyright © 2002 McGraw-Hill Ryerson, Ltd.
T1.1 Chapter Outline
Chapter 1
Introduction to Corporate Finance
Chapter Organization
 1.1 Corporate Finance and the Financial Manager
 1.2 Forms of Business Organization
 1.3 The Goal of Financial Management
 1.4 The Agency Problem and Control of the Corporation
 1.5 Financial Markets and the Corporation
 1.6 Financial Institutions
Irwin/McGraw-Hill
copyright © 2002 McGraw-Hill Ryerson, Ltd.
T1.1 Chapter Outline
Chapter 1
Introduction to Corporate Finance
Chapter Organization (cont’d)
 1.7 Trends in Financial Markets and Financial Management
 1.8 Outline of the Text
 1.9 Summary and Conclusions
Irwin/McGraw-Hill
copyright © 2002 McGraw-Hill Ryerson, Ltd.
T1.2 The Four Basic Areas of Finance
The Four Basic Areas of Finance
 Corporate Finance
 Investments
 Financial Institutions
 International Finance
Irwin/McGraw-Hill
copyright © 2002 McGraw-Hill Ryerson, Ltd.
T1.2 The Four Basic Areas of Finance - Corporate Finance
Corporate Finance
 Long-term investments (What long term investment
should we take on?)

Capital Budgeting
 Long-term financing (Where, how, from whom)

Capital Structure
 Short-term financing (How to manage everyday financial
and operating activities)

Working Capital Management
 Risk management (hedging exposure to fluctuations)

Irwin/McGraw-Hill
Derivative securities
copyright © 2002 McGraw-Hill Ryerson, Ltd.
T1.3 A Simplified Organizational Chart (Figure 1.1)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 10
T1.4 Forms of Business Organization
 Organizational Forms
 Sole Proprietorship
(The owner has unlimited liability)

Partnership
General Partnership (All partners share in gains and losses,
All bear unlimited liability)
Limited Partnership (One or more general partners have
unlimited liability – The limited partners do not actively run
the business, their liability is limited to their contribution
to the partnership)

Corporation
Limited Liability Company
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 11
T1.5 International Corporations (Table 1.1)
Company
Country of Origin
Type of Company
In Original Language
Translated
Bayerische
Moterenwerke AG
Germany
Aktiengesellschaft
Corporation
Dornier GmBH
Germany
Gesellschaft mit
Beschrankter Haftung
Limited liability co.
Rolls-Royce PLC
United Kingdom
Public limited company
Public limited co.
Shell UK Ltd.
United Kingdom
Limited
Corporation
Unilever NV
Netherlands
Naamloze Vennootschap
Joint stock co.
Fiat SpA
Italy
Societa per Azioni
Joint stock co.
Volvo AB
Sweden
Aktiebolag
Joint stock co
Banco Santander C H, S.A.
Spain
Sociedad Anónima
Joint stock co
Peugot SA
France
Société Anonyme
Joint stock co.
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 12
T1.6 The Goal of Financial Management
 What are firm decision-makers hired to do?
“General Motors is not in the business of making automobiles. General Motors
is in the business of making money.” --Alfred P. Sloan
 Possible goals of the firm ? (Stakeholder vs. Shareholder)
See: Value Maximization, Stakeholder Theory, and the Corporate Objective
Function (MICHAEL C. JENSEN Harvard Business School; The Monitor
Company; Social Science Electronic Publishing (SSEP), Inc.)
http://papers.ssrn.com/abstract=220671
Three equivalent goals of financial management:
Maximize shareholder wealth
Maximize share price
Maximize firm value
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 13
T1.7 The Agency Problem
The Agency Problem and Control of the Firm
 Agency Relationships and Management Goals
 Do managers Act in the Shareholders’ interests?
Agency costs
Direct agency costs
Indirect agency costs
 Mechanisms to ensure Managers are acting in
shareholders’ interest
Managerial compensation
Board of directors
Takeover activity
Proxy Contest
Institutional Investors
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 14
T1.8 Financial Markets
Financial Markets
 What is the role of financial markets in corporate
finance?
Cash flows to and from the firm
Money markets and capital markets
Primary versus Secondary markets
 How do financial markets benefit society?
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 15
T1.9 Cash Flows Between the Firm and the Financial Markets (Figure 1.2)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 16
T1.10 Financial Institutions
Banks are Intermediaries
 Intermediaries provide scale economies in services
 This allows them to earn income on services provided:
Earn interest on the spread between loans and borrowings
Service fees (e.g. bankers acceptance, stamping fee)
Direct finance - services to clients without holding funds
 The 10 largest Canadian financial institutions are:
6 chartered banks, 2 financial holding companies,
1 credit union, 1 pension fund (see Table 1.4 in the text)
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 17
T1.12 Chapter 1 Quick Quiz
Quick Quiz
1. Who performs the financial management function in
the typical corporation?
2. What are the major advantages and disadvantages of
the corporate form of organization?
3. Why is shareholder wealth maximization a more
appropriate goal than profit maximization?
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 18
T1.12 Chapter 1 Quick Quiz
Quick Quiz
1. Who performs the financial management function in
the typical corporation?
Treasurer, CFO, Vice-President of Finance
2. What are the major advantages and disadvantages of
the corporate form of organization?
Pros: limited liability, raising capital, unlimited life, ease of
ownership transfer
Cons: expensive to form, double taxation, agency problems
3. Why is shareholder wealth maximization a more
appropriate goal than profit maximization?
It takes time and risk into account
FINANCIAL ANALYSIS AND FORECASTING (HEC-MONTREAL) Fundamentals of Corporate Finance 2002 McGraw-Hill Ryerson, Ltd
Slide 19