Session 1 - Introduction of Corporate Finance
Session 1 - Introduction of Corporate Finance
Session 1 - Introduction of Corporate Finance
Corporate Finance
• Forms of business organization
• Objective of the firm: Maximize wealth
• Determinants of fundamental value
• Financial securities, markets and institutions
• Agency problem and corporate governance
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Business Organization from Start-up
to a Major Corporation
• Sole proprietorship
• Partnership
• Corporation
Starting as a Proprietorship
• Advantages:
– Ease of formation
– Subject to few regulations
– No corporate income taxes
• Disadvantages:
– Limited life
– Unlimited liability
– Difficult to raise capital to support growth
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Starting as or Growing into a
Partnership
• A partnership has roughly the same
advantages and disadvantages as a sole
proprietorship.
Becoming a Corporation
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Advantages and Disadvantages of a
Corporation
• Advantages:
– Unlimited life
– Easy transfer of ownership
– Limited liability
– Ease of raising capital
• Disadvantages:
– Double taxation
– Cost of set-up and report filing
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Goal of the Firm
• Profit maximization – Not really
• Shareholders wealth maximization – Yes!
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What else do businesses, customers,
investors and regulators care nowadays?
• There are issues go beyond profit-
maximization
• Corporate Social Responsibility (CSR) and
Environmental, Social and Governance (ESG)
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Free Cash Flows (FCF)
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What determines a firm’s
fundamental, or intrinsic value?
Intrinsic value is the sum of all the future
expected free cash flows when converted into
today’s dollars:
FCF1 FCF2 FCF
Value = + + +
(1 + WACC) 1
(1 + WACC) 2
(1 + WACC)
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Primary vs. Secondary Security Sales
• Primary
– New issue (IPO or seasoned)
– Key factor: issuer receives the proceeds from the
sale.
• Secondary
– Existing owner sells to another party.
– Issuing firm doesn’t receive proceeds and is not
directly involved.
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Agency Conflicts
• Conflicts between stockholders (owners) and
managers
➢ Managers are naturally inclined to act in their own
best interests (which are not always the same as the
interest of stockholders)
• Conflicts between stockholders and creditors
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More Questions
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More Questions
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More Questions
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