Corporate Finance

Chapter 1:
Introduction to Corporate Finance

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Instructor
Name: Atsushi Chino (at IUJ since 2012)
E-mail: achino@iuj.ac.jp
Courses:
Corporate Finance (Fall 2015)
Investment and Asset Pricing (Winter 2016)
Corporate Governance (GSIM, Winter 2016)
Financial Accounting (Spring 2016)

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Topics Covered
Corporate Investment and Financing
Decisions
The Role of the Financial Manager and the
Opportunity Cost of Capital
Goals of the Corporation

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Investment and Financing Decisions

Common Finance Terminology
Real assets
Financial assets
Capital markets and financial
markets
Investment (capital budgeting)
Financing

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Investment and Financing Decisions

Real Assets
Assets used to produce goods and services.
Machinery & Equipment, etc.

Financial Assets
Financial claims to the income generated by the
firms real assets.
Bond, Equity, etc.

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Investment and Financing Decisions

Investment decision
purchase of real assets

Financing decision
sale of financial assets

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Investment and Financing Decisions

Investment Decision
Decision to invest in tangible or intangible
assets.
also called the Capital Budgeting Decision

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Investment and Financing Decisions

Capital Budgeting

Tangible Assets

Intangible Assets

Expand Stores

New Drug R&D

@ $800 million

@ $800 million

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Table 1.1 Recent Investment/ Financing

Decisions
Company Recent Investment Decisions
Boeing (U.S.)

Delivers first Dreamliner after investing a

reported $30 billion in development costs.
ExxonMobil
Spends $7 billion to develop oil sands at
(U.S.)
Fort McMurray in Alberta.
GlaxoSmithSpends $4 billion on research and
Kline (UK)
development for new drugs.
LVMH (France) LVMH acquires the Italian Jeweler, Bulgari,
for $5 billion.
Procter &
Spends $8 billion on advertising.
Gamble (U.S.)
Tata Motors
Opens a plant in India to produce the
(India)
world's cheapest car, the Nano. The facility
costs $400 million.
Union Pacific Invests $330 million in 100 new
(U.S.)
locomotives and 10,000 freight cars and
chassis.
Vale (Brazil)
Opens a copper mine at Salobo in Brazil.
The project cost nearly $2 million.
Walmart (U.S.) Invests 12.7 billion, primarily to open 458
new stores around the world.

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Recent Financing Decisions

Reinvests $1.7 billion of profits.

Spends $12 billion buying back shares.

Pays $3.2 billion as dividends.
Pays for the acquisition with a mixture of cash
and shares.
Raises 100 billion Japanese yen by an issue of 5year bonds.
Raises $400 million by the sale of new shares.
Repays $1.4 billion of debt.
Maintains credit lines with its banks that allow
the company to borrow at any time up to $1.6
billion.
Issues $5 billion of long-term bonds in order to
repay short-term commercial paper borrowings.

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Investment and Financing Decisions

What Is a Corporation?
Legal entity, owned by shareholders
Shareholders own equity of corporations
Shareholders have limited liability and cannot be
held personally responsible for corporations debts
when the corporation goes bankrupt.

Role of The Financial Manager

(2)

(1)

Financial
manager

Firm's
operations
(3)

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(4a)

Financial
markets

(4b)

(1) Cash raised from investors (bond, equity)

(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors (interest, dividend)

Bond & Equity

Bond: this is borrowing from investors. You
pay fixed interests (or coupons) every
period to bondholders until you pay back
the borrowed amount.
Equity: you pay non-fixed dividends to
shareholders when you make profits.
Shareholders are the owner of corporations.

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Opportunity cost of capital

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Opportunity cost of capital

Cost of capital
Opportunity cost of capital
Required rate of return
Discount rate
These are the same concept: it is a required
(expected) rate of return of an investment
project for shareholders.

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Goals of The Corporation

Each shareholder wants three things:
1. To be as rich as possible, that is, to maximize his or her (present value of)
wealth.
2. To transform that wealth into the most desirable time pattern of consumption
either by borrowing to spend now or investing to spend later.
3. To manage the risk characteristics of that consumption plan.

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Goals of The Corporation

Shareholders desire wealth maximization
Do managers maximize shareholder wealth?

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Goals of The Corporation

In reality, probably not..
Mangers have many constituencies:
stakeholders(e.g., creditors, employees)
Agency problems represent the conflict of
interest between management and owners
(e.g., private benefits)

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Goals of the Corporation

Agency Problems
Managers, acting as agents for stockholders, may
act in their own interests rather than maximizing
value

Agency costs are incurred when:

Managers do not attempt to maximize firm value
Shareholders incur costs to monitor managers and
constrain their actions

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Goals of the Corporation

Tools to Ensure Management Pays Attention
to the Value of the Firm
Corporate Governance (GSIM, Winter 2016)
Monitoring: managers actions subject to the
scrutiny of board of directors
Executive compensation: financial incentives
provided, such as stock options