Chapter 1 - Introduction To Corporate Finance

2023
UNIVERSITY OF ECONOMICS
FACULTY OF FINANCE
CORPORATE FINANCE
Nguyen Quang Minh Nhi, Ph.D

[email protected]
COURSE OUTLINE
CHAPTER 1: INTRODUCTION TO CORPORATE FINANCE
CHAPTER 2: CAPITAL STRUCTURE
CHAPTER 3: CAPITAL BUDGETING
CHAPTER 4: WORKING CAPITAL MANAGEMENT
CHAPTER 5: DIVIDENDS AND DIVIDEND POLICY
CHAPTER 6: FINANCIAL STATEMENT ANALYSIS
FIN 3004 – CORPORATE FINANCE
CHAPTER I
INTRODUCTION TO CORPORATE FINANCE
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2023
READING
• Chapter 1, Fundamentals of Corporate Finance;
Stephen A. Ross, Randolph W. Westerfield, Bradford
D. Jordan; McGraw-Hill (2010).
• Chương 1, Giáo trình Tài chính doanh nghiệp;
Nguyễn Hoà Nhân (2013).
CHAPTER OUTLINE
1.1. Form of Business Organization

1.2. Financial Manager
1.3. Corporate Finance
1.4. The Goal of Financial Management
1.5. The Agency Problem and Control of the
Corporation
1.6. Financial Markets and the Corporation
1.1. Forms of Business Organization

Other forms:
Three major forms in the United States - Corporation
 Sole Proprietorship
+ C-Corp
+ S-Corp
 Partnership
- Limited Liability Company (LLC): hybrid of
• General partnership and corporation
• Limited - Limited Liability Partnership (LLP): based
 Corporation on danh tieng of partners
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2023
1.1.1. Sole Proprietorship

A sole proprietorship is a business owned by one person.
Advantages Disadvantages
– Easiest to start – Limited to life of owner
– Least regulated – Equity capital limited to
– Single owner keeps owner’s personal
all the profits wealth
– Taxed once as – Unlimited liability
personal income – Difficult to sell
ownership interest
1.1.2. Partnership
A partnership is similar to a proprietorship except that there are two

or more owners (partners)
– Two or more owners – Unlimited liability
– More capital • General partnership
available • Limited partnership
– Relatively easy to – Partnership dissolves
start when one partner dies or
– Income taxed once wishes to sell
as personal income – Difficult to transfer
ownership
1.1.3. Corporation
A business created as a distinct legal entity composed of one or
more individuals or entities
– Limited liability – Separation of ownership
– Unlimited life and management
– Separation of – Double taxation (income
ownership and taxed at the corporate
management rate and then dividends
taxed at the personal
– Transfer of ownership is
rate)
easy
– Easier to raise capital
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2023
Board of
Directors
Chairman and
chief executive
officer (CEO)
Vice president
Vice president Vice president Vice president
human
marketing finance (CFO) production
resource
Financial Accounting
Department Department
Figure 1.1: A sample simplified Organization Chart

 Financial managers try to answer some or all of the
questions.
 The top financial manager within a firm is usually the
Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting and data processing
More details: https://www.youtube.com/watch?v=pOQUQHZCKIs
1.3. Corporate Finance

accouting people: control, brake (phanh),
Some important questions that are answered using accural method
finance: finance people: accelerator (ga), cashflows
 What long-term investments should the firm take
on? Capital budgeting
 Where will we get the long-term financing to pay
for the investment? Capital structure
 How will we manage the everyday financial
activities of the firm? Working capital
management
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1.3. Financial Management Decisions

Capital budgeting
– What long-term investments or projects should the
business take on?
Capital structure
– How should we pay for our assets?
– Should we use debt or equity?
Working capital management
– How do we manage the day-to-day finances of the
firm?
1.3.1. Capital budgeting

 The process of planning and managing a firm’s long-
term investments.
 The financial manager tries to identify investment
opportunities that are worth more to the firm than
they cost to acquire.
 The types of investment opportunities that would
typically be considered depend in part on the nature
of the fi rm’s business.
Balance Sheet Model of the Firm
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2023
The Capital Budgeting Decision

size
timing
risk
1.3.2. Capital structure

 The mixture of debt and equity the firm uses to
finance its operations.
 The ways in which the firm obtains and manages the
long-term financing it needs to support its long-term
investments.
(1) How much should the firm borrow?
(2) What are the least expensive sources of funds for
the firm?
(3) How and where to raise the money.
The Capital Structure Decision

phát hành CP ÿuuuu đãi => tăng VCSH =>
captial structure
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2023
1.3.2. Capital structure
1.3.3. Working capital management

 A firm’s short-term assets and liabilities.
tính thanh khoan: chuyen đoi thành tien
 A day-to-day activity that ensures that the firm has mÿat theo huong
hÿuÿong giam dan, kh mat di
sufficient resources to continue its operations and avoid phan lon giá tri cua nó
costly interruptions.
(1) How much cash and inventory should we keep on hand?
(2) Should we sell on credit? If so, what terms will we offer,
and to whom will we extend them?
(3) How will we obtain any needed short-term financing?
Will we purchase on credit or will we borrow in the short
term and pay cash? If we borrow in the short term, how and
where should we do it?
net working capital = current assets-current

liabilities
Short-term Asset Management
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1.4. Goal of Financial Management
What should be the goal of a corporation?

– Maximize profit?
– Minimize costs?
– Maximize market share?
– Maximize the current value of the company’s
stock?
=> maximize shareholders' ÿwealth =
Does this mean we should do anything and
maximize share price = maximize firm's
everything to maximize owner wealth? creating value
value high share price x No.of oustanding shares
= high market capitalization (firm value)
1.5.1. The Agency Problem
Agency relationship:
o Principal hires an agent to represent his/her
interests
o Stockholders (principals) hire managers (agents)
to run the company
 Agency problem:
o Conflict of interest between principal and agent
 Management goals and agency costs
1.5.1. The Agency Problem
Agency costs: costs of the conflict of interest between

stockholders and management.
 Indirect agency costs lost opportunities

 Direct agency costs
expense: benefit to managers, costs for
shareholders
costs arise from the need to monitor
managers (cty thuê kiem toan ve ktra đo
chính xác cua thông tin trên BCTC)
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2023
1.5.2. Managing Managers
 Managerial compensation:
– Incentives can be used to align management and
stockholder interests
– The incentives need to be structured carefully to make
sure that they achieve their goal
 Corporate control:
– The threat of a takeover may result in better
management
 Other stakeholders
Figure 1.2: Cash Flows between the Firm and the Financial
Markets
1.6. Financial Markets

primary markets: raise funds
 Cash flows to the firm
secondary markets: mua đi bán lai quyen
soÿ huu chÿ
soÿhuu uÿng khoan, tao tính thanh
chu
 Primary vs. secondary markets khoan cho CK => kh anh huong nguon von
– Dealer vs. auction markets cua cty
=> ton tai song song voi
– Listed vs. over-the-counter securities
• NYSE
• NASDAQ
More details: https://www.forex.com/en/market-analysis/latest-
research/what-is-the-role-of-financial-markets/

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2023

Nguyen Quang Minh Nhi, Ph.D

CHAPTER 1: INTRODUCTION TO CORPORATE FINANCE

CHAPTER 2: CAPITAL STRUCTURE

CHAPTER 3: CAPITAL BUDGETING

CHAPTER 4: WORKING CAPITAL MANAGEMENT

CHAPTER 5: DIVIDENDS AND DIVIDEND POLICY

CHAPTER 6: FINANCIAL STATEMENT ANALYSIS

FIN 3004 – CORPORATE FINANCE

1.1. Form of Business Organization

1.1. Forms of Business Organization

1.1.1. Sole Proprietorship

A partnership is similar to a proprietorship except that there are two

1.2. Financial Manager

Figure 1.1: A sample simplified Organization Chart

1.2. Financial Manager

1.3. Corporate Finance

1.3. Financial Management Decisions

1.3.1. Capital budgeting

Balance Sheet Model of the Firm

The Capital Budgeting Decision

1.3.2. Capital structure

The Capital Structure Decision

1.3.2. Capital structure

1.3.3. Working capital management

net working capital = current assets-current

1.4. Goal of Financial Management

What should be the goal of a corporation?

1.5.1. The Agency Problem

1.5.1. The Agency Problem

Agency costs: costs of the conflict of interest between

 Indirect agency costs lost opportunities

1.5.2. Managing Managers

1.6. Financial Markets

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