Sources of Corporate Finance: Corporate Finance

Question 1

Bonds: Two perspectives

Answer 1

The Investor
-Investor return= YTM=IRR
The Company
-Company Cost of Debt=IRR

Question 2

The Company: Characteristics

Answer 2

• Separate legal identity
• Owned by shareholders
• Bond holder are contractual creditors
• Run by directors and management

Question 3

The Company: Agency Problem

Answer 3

• Shareholders own the company and directors run the company
• Shareholders ensure directors run the company in their best interest rather than the director through corporate governance

Question 4

Corporate Finance

Answer 4

• Companies invest in real assets that could be tangible or intangible.
• These assets are used to generate revenue and profit (cash)

Question 5

How a company should use cash?

Answer 5

• re-invest in more assets
• repay lenders
• pay dividends to shareholders
• increase salaries/ bonuses
• corporate jet
• buy back shares

Question 6

Corporate Goal

Answer 6

• Maximise shareholder wealth
• Maximise the market value of the company
• Maximise the market value of the share
• Companies maximise market value by investing in all projects where the return is greater than the opportunity cost of capital
• Cost of capital varies with risk

Question 7

Where money for investment comes from?

Answer 7

Equity
-From shareholders who buy a share in company
Debt
-From finance providers who lend money
Retained Earnings
-From funds previously earned by the company

Question 8

The 3 Corporate Finance Decisions

Answer 8

• Financing Decisions
• Investing Decisions
• Dividend Decisions