Ch1- Introduction to Corporate Finance Flashcards
Corporate Finance
study of answering these 3 questions
3 questions to answer in Corporate Finance
- what long term investments should the firm take on?
- where will we get the long term financing to pay for investment?
- how will we manage the daily financial activities of the firm?
Who answers the 3 questions of corporate finance
financial manaers
Whos the top financial manager
the CFO
treasurer
oversees cash management, capital spending, financial planning
this is who we focus on the most
Controller
oversees taxes, cost accounting, financial acocunting and data processing
What are the 3 types of financial management decisions? ANSWERS TO THE 3 BIG QUESTIONS
- Capital budgeting
- Capital Structure
- Working capital managment
Capital Budgeting
q1- what long term investetns or projects should the business take on?
process of planning & managing long term inv.
ex: retailer deciding to open a new store
What is capital structure?
q2. How should we pay for assets? Should we use debt or equity?
-mixture of short-term debt, long-term debt, and equity the firm uses to finance its operations
What is working capital management?
How do we manage the day to day finances of the firm?
managing the working capital
Balance sheet model of the firm?
All the assets of the firm needs to be financed by either debt or equity!
What are the five forms of Business Organization
Sole propreitorship
Partenrhsip
Corproation
income trust
cooperative
Corportation other names
joint stock company, public limited company, limited liability copanies
Sole proprietorship
one owner
-least regulated, easy to start, one owner gets $$, taxes once as personal income
-unlimited liability, limited life, equity capital =owners personal wealth, difficult to sell ownership interest
Partnership
2 or 2+ owners
-2+ owners, more human and financial capital, relatively easy to start, income taxed once as personal income
-unlimited liabilitiy (general partenrship or limited partnership), partenrship dissolves when one dies or sells, difficult to transfer ownership, disagreements
Corporation
separate legal entity
-limited liability, unlimited life, separation of ownership and management, transfer of ownership easy, easy to raise capital
-separation of ownership and management, double taxation (income is taxed at corporate rate, then dividends taxes at personal rate)
what is double taxation
Govt taxes companies on income
dividends recieved to ppl are taxed again
What is an income trust
non corporate form of organization
income funds; they HOLD the debt and equity of a business and distribute the income to unitholders (middlemen)
corporations pay income to the trust as TAX DEDUCTIBLE interest payments, then these are paid out to owners!!! so its tax efficient
Advantages of an income trust
not subject to corporate income tax and income is typically taxed in hands of unit holders
investors view income trust as more tax efficient
disadvantages of income trust
income trust are NOT corproations, so they dont have the advantages one has
Co-operatiove
4 types
a co-op is an enterprise that is equally owned by its members, who share the benefits of co-operations based on how much they use the co-ops services
- consumer
- producer
- worker
- multi stakeholder
advantage of co-op
equally owned by its members
helps its members compete more effectively while creating social capital
disadvantages of co=op
potentially difficult to reach decisions based on premise of equal ownership by members
2 subtypes of business organization
co-operative and icnome trust
3 goals of financial management
- max shareholder wealth
- max share price
- max firm value
Agency Relationship
relation b/w SH & management
princpal hires an agent to represent their interests
strockholders are the principals, and they hire managers (Agents) to run the company
Agency Problem
Conflicts of interest can exist between the principal (SH) and the agent
Agency Costs
Direct agency costs
Indirect Agency costs: lost opportunity
What are 3 aspects of managing managers
managerial compensations
corproate control
conflicts with other stakeholders
what is managerial compenation
incentives that cam be used to align management and stockholder interests
the incentives need to be structured carefully to make sure that they acheive their goal
Corporate control
the threat of a takeover may result in better maangement
What is social responsiblity and ethical investing
investors are increasingly demanding that corps be responsible
issues include how a corp treats the community in which it operates their customers corp gov, their empoyees, ENVIRIOENMT ETC.
where does cash flow to? and from?
the firm
What is a capital market
ex:
long term debts and shares of stock!!!
TSX NYSE
Waht is money market
-dealers
-location
short term debt securities are bought/sold (IOUs)
chartered banks and investment dealers
no physical locations
Steps in the cash flows between the firm and the financial markets
A. ORIGINAL firm issues securities, purchasing firm buys sercurties (Cash purch->orig)
B. ORIGINAL Firm invests cash in cash assets (cureent assets & fixed assets)
C. Cash flow from firm’s assets (original company has cash flow outwards)
D. Govt and other stakholders get cash flow from C (Original firm)
E. Cash flows from C reinvested into Original firm
F. Dividends and debt payments from Cash flow from assets fo to purchasing firm
What are financial institiutions
intermediaries between suppliers and users of funds
ex: banks or investmetn dealers
upcoming trend in fin markets and management- financial engineering
process of desinging new securiities or financial processes
upcoming trend in fin markets and management- e business
e commerce
upcoming trend in fin markets and management- deregulation
reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry
primary market
-who runs markets
where govt/companies issue a new security, not previously traded on any exchange
- invesetment dealers (RBC capital market, cibc capital markets etc,) UNDERWRITE public offerings
secondary marekt
where investors buy and sell securities.
Trades take place on the secondary market between other investors and traders rather than from the companies that issue the securities.
Can you transfer general partner ownership easier or limited partner ownership?
Limited partners interest can be sold easily
General Parnter interest is not easily transferred
why did a lot of income trusts convert back?
because bell threatened to become an income trust cuz of the immense benefits, now they are also taxed so there are not very many benefits
consumer co-op
provides products’services to its memberrs
(Retail / housing / health care/childcare)
producr co-op
process and marekts g/s produced by members
(entrepreneur co-op, artisan co-op, farmer co-op)
wroker c-op
provides employment to members
multi-stakheolder co=op
serves the needs of different stakeholder groups
The key benefits
of co-ops are helping producers compete effectively in the marketplace, serving rural and remote
communities, developing community leadership, building social capital, and promoting local ownership
and control.
Indirect Agency Cost
Cost of a loss opportunity when SH & manager disagree
EX; chance of a new venture could be very profitable for SH, but management doesnt go forth with it cuz it could be risky for management jobs
2 types of direct agency costs
- corporate expense: beenfits management but costs the Shareholders
- expense that arises from the need to monitor management
actions or the incentive fee paid to the managers.
What is underwrritng public offerings
when an investment dealer purchases security from the firm and markets to the public in primary market
profit: sell for higher price than purchase
what is a syndicate
group of investment dealers
are private offerings of debt and equity underwrritten?
no! only public offerings are
two types of secondary markets
auction market: stocks are auctioned (TSX)
dealer market: stocks and long term debt (over the counter market)
How do banks make income
indirect finance/spread income: spread between interest paid on deposits and higher rate earned on loans
direct finance/fee income: offering other services (bankers acceptances and stamping fees_
regulatory dialectic
big 6
the big sic chartered banks
capital formula
debt + equity
return on equity formula
net income/shareholders equity
or
leverage * turnover * efficiency ratio
last question on lemond stand slide 1 - do you need the formulas memorized?
