CORPORATE FINANCE

Ms. Nguyen Thi Ngoc Lang y gBanking and Finance Faculty

Foreign Trade UniversityForeign Trade University

Introduction to Corporate pFinance

Module’s objectives:Provide students understandings of goal ofProvide students understandings of goal of

corporate finance; project valuation, risks andreturns; asset valuation, capital structure anddividend policyAfter the course, student should be able to evaluate

correctly investment projects; apply basic assetvaluation approaches and understand short-termfi i l t h d l tfinancial management approaches and long-termfinancial management approaches

Introduction to corporate finance

Syllabus:Chapter 1: Overview of Corporate FinanceChapter 1: Overview of Corporate FinanceChapter 2: Financial Statement AnalysisChapter 3: Project ValuationChapter 4: Risks and ReturnspChapter 5: Capital structureChapter 6: Dividend PolicyChapter 6: Dividend Policy

Introduction to Corporate Finance

- Valuation strategyAttendance : 10%- Attendance : 10%

- Mid-term test (presentation): 30%- Final examination (60%)

Introduction to Corporate Finance

Reference:Luu Thu Huong & Vu Duy Hao , Corporate Finance, National Economic University, Publishing House, 2007Nguyen Hai San , Corporate financial management, financial Publishing House 2005Publishing House, 2005Brealey, R.A., S.C. Myers and A.J. Marcus, Fundamentals of Corporate Finance, fourth edition, McGraw- Hill Inc, 2003 Ross,Thompson, Christensen, Westerfield and Jordan, Fundamentals of Corporate Finance, second edition, McGraw-Hill Sydney 2001Hill, Sydney, 2001

CHAPTER 1 OVERVIEW OFCHAPTER 1: OVERVIEW OF CORPORATE FINANCECORPORATE FINANCE

Content

Enterprises and forms of enterprisesDefinition of corporate financeDefinition of corporate financeThe goal of corporate financeFi i lFinancial managerAgency problemFinancial market and enterprises

Enterprises and Forms of EnterprisesDefinition of enterprises:

According to enterprise law number 60/2005/QH11dated on 29th, Nov, 2005, enterprises “ are economicinstitutions having own names, assets and stable tradingheadquarters, are registered in accordance withregulations in order to do business”regulations in order to do business

Enterprises and form of EnterprisesTypes of enterprises Advantages DisadvantagesTypes of enterprises Advantages Disadvantages

Sole proprietorshipA business is owned by one person

-Simple set-up procedures, and inexpensive to form-Owners receive all profits

-Owner has unlimited liability-life of proprietorship is limited to owner’s life spanby one person Owners receive all profits

-Personal income taxowner s life span- Amount of equity can be raised is limited to the amount of the proprietor’s personal wealth

Partnership A business formed by

-Simple set-up procedures, inexpensive to form

-Unlimited liability for partnership debt-Partnership terminates when a general y

two or more individuals or entities

p-Partners receive all gains and profits-Personal income tax

p gpartner wishes to sell out or dies-Amount of equity that can be raised is limited to the partners’ combined wealthDifficult to transfer ownership-Difficult to transfer ownership

Enterprises and forms of enterprisesF f t i Ad t Di d tForm of enterprises Advantages DisadvantagesCorporation -Shareholders has limited

liabilityEasy to raise capital by

-Expensive and time consuming to set up

Double tax-Easy to raise capital by issuing shares-Not limited by owners’ life span

- Double tax-Agency problem-Founder is possible to loss ownershipspan

-Ownership is transferableownership

What is corporate financeCorporate finance is the study of ways to answer three questions?1, What long term investments the company should take on? investment decision?2 Wh ill h h l fi i2, Where will the company get the long –term financing to pay for its investments? Capital structure3 How will you manage your everyday financial3, How will you manage your everyday financial activities such as collecting from customers and paying suppliers working capital managementpp g p g

The goal of corporate finance

Maximize shareholders’ valueWhat is the shareholder’s value?Why the gold of corporate finance is to maximizeWhy the gold of corporate finance is to maximize

shareholders’ value?

Financial ManagersFinancial manager is in charge of answering three basic questions

Board of directors

CEO

Vice president Marketing

CFO Vice president production

TreasurerController

Cash manager

Credit manager

Tax manager

Cost Accounting manager

Agency problem

The possibility of conflict of interestbetween the stockholders and managementof a firm.Agency costs refer to the costs of theconflict of interest between stockholdersand management.

Agency ProblemAgency problem is solved by two ways :•Managerial compensation

Managerial compensation is usually tied to financialManagerial compensation is usually tied to financialperformance

Incentive managers have relates to job prospectsC l f h fi h h ld h i h l•Control of the firm: shareholders have proxy right to elect

management board•M&A market : avoiding a takeover by another firm givesg y gmanagement incentive to act in the stockholders’ interest

Financial Market and EnterprisesC h fl b fi d i

2. Firms invest in assets 1, Firms issues securities

Financial markets

Short term

Cash flow between firms and enterprises

Current assets

Fixed assets

Short-term debts

Long term debts

6, Reinvest

3, Cash flows from assets 5, Dividend and debts

Equity

3, Cash flows from assetsdebt payment 4. G

overother sta rnm

ent andakeholders d

Financial market and enterprisesFinancial market is a way of bringing buyersand sellers together and in the financial marketand sellers together and in the financial marketdebt and securities are bought and sold

Financial market and enterprisesFunctions of financial market

Borrowing and Lending: Financial markets permit theg g ptransfer of funds from one agent to another for eitherinvestment or consumption purposes.Price Determination: Financial markets providevehicles by which prices are set both for newly issuedfi i l t d f th i ti t k f fi i lfinancial assets and for the existing stock of financialassets.

Financial Market and EnterprisesInformation Aggregation and Coordination: Financial marketsact as collectors and aggregators of information about financial

t l d th fl f f d f l d t basset values and the flow of funds from lenders to borrowers.Risk Sharing: Financial markets allow a transfer of risk fromthose who undertake investments to those who provide funds forpthose investments.Liquidity: Financial markets provide the holders of financial

t ith h t ll li id t th tassets with a chance to resell or liquidate these assets.Efficiency: Financial markets reduce transaction costs andinformation costs.

Financial Markets and EnterprisesTypes of financial market

Auction market is some form of centralized facility by which buyers andsellers, through their commissioned agents (brokers) execute trades in ang g ( )competitive biding process. Bid and asked prices are centralized onlocation (computer network) which is accessible to all would be buyersand sellers

Call market (art auction): bid and asked prices are posted at one time( ) p pContinuous market (stock exchange and real estate market): bid and asked prices can be posted at any time the market is open and exchanges take place on a continual basic

Over the counter market has no centralized mechanism. It is a publicOver the counter market has no centralized mechanism. It is a public market consisting of dealers spread across a region , a country , the world , who post bid and asked prices by themselves for one type of asset and the stand ready to buy and sell units of this asset with any one who chooses to trade at posted prices (NASDAQ)trade at posted prices (NASDAQ)

Financial Market and Enterprises

Intermediation Financial Markets is afinancial market which financialfinancial market which financialintermediaries help transfer funds fromsavers to borrowers by issuing certain typessavers to borrowers by issuing certain typesof financial assets to savers and receivingother types of financial assets fromother types of financial assets fromborrowers

Financial Market and EnterprisesPrimary market are securities market in which newly

issued securities are offered for sale to buyers.S d k t iti k t i hi h i tiSecondary market are securities market in which existing

securities that have previously been issued are resold.Debt market is a market where debt instruments are

bought and soldEquity market where shares are tradedThe money market is the market for shorter –termThe money market is the market for shorter term

securities (one year or less remaining to maturity)The capital market is the market for longer-term

iti th t t it d t )securities, more than one year to maturity date)