1. Introduction to Corporate Finance

Cards (18)

  • The balance sheet is a static picture of a firm’s financial position at a single point in time.
  • The income statement is a dynamic, moving picture of a firm’s financial position over a period of time.
  • Some of the targets that a corporation and its financial management are called upon to satisfy include minimizing expenses, increasing a company's growth rate and market share, and reducing collection times whilst simultaneously stretching payable time. Other financial targets include budgeting for contingencies, minimizing risk to the firm, minimizing the need for and thereby the cost of excess inventory, seeking an optimal capital structure, financial planning and forecasting, and creating budget projections.
  • The optimal capital structure is the combination of debt and equity financing that maximizes the value of a firm.
  • Corporate targets provide a definitive map of the firm’s most direct path to success. However, sometimes a company's management needs to make decisions that diverge from this path.
  • The scope of corporate finance revolves around a number of basic areas:

    1. Raising money to keep the firm's activities;
    2. Using these money in investment projects;
    3. Clear understanding of capital markets;
    4. Risk management compliance (avoid, mitigate, undertake);
    5. Corporate governance, which is the decision-making process dedicated to design the business structure.
  • In summary, the main roles of a financial manager are as follows:
    interacting with experts across a variety of disciplines
    • understanding market economics
    • developing a profitable pricing strategy
    • managing cash flow
    • accumulating capital to undertake projects and investments
    negotiating licensing and other agreements for a firm
    monitoring and ensuring regulatory compliance
  • The spot market is where financial instruments are traded for immediate delivery.
  • Financial markets are the point where suppliers and recipients of funds meet, and financial institutions are participants within the structure of these markets. The relationship between the two is symbiotic; they are interdependent functionaries without which the other might exist but in a much-diminished form.
  • Primary markets, where items are created and initially sold, and secondary markets, where items are sold as after-market items, i.e., words, resold. Markets can also be divided according to whether they are international in nature or purely domestic.
    Finally, markets can be defined according to whether they are public, where all players are invited to participate, or private, where only select players are invited to be participants.
  • Physical markets are those markets in which commodities such as metals and precious metals products, food products, and building materials, among others, are sold.
  • Short-term marketable securities are financial instruments that mature in under one year.
  • Capital markets are long-term financial markets in which the participants are usually corporations seeking to raise cash to use in their business projects or investments and financial intermediaries seeking to put their surplus cash to use and make some money in the process. The investments in these markets can be long-term or short-term, but bonds and stocks are purchased either for the cash they will generate, interest paid on bonds and dividends paid on stocks, or for the growth that will be realized over the length of the holding period.
  • A corporation requiring external funding has three primary options:
    1. utilizing financial markets which are made up of short-term money markets and long-term capital markets,
    2. utilizing private placement which involves the direct sale of a new security—either debt or equity—to a single investor or a group of investors,
    3. utilizing financial institutions such as banks
  • The reason for undertaking a private placement is to allow a firm to raise capital without going through all the rigorous and time-and-capital-consuming steps involved in a Securities and Exchange Commission (SEC) filing. Because private placements are only offered to a limited number of select investors, this transaction does not have to be registered with the Securities and Exchange Commission.
  • A prospectus is an information pamphlet for prospective investors that accompanies a security.
  • Financial institutions are intermediaries. Examples of such intermediaries include stock markets, banks, pension funds, money market funds, mutual funds, and institutional investors whom perform intermediation services by transforming direct financial claims into indirect financial claims.
  • Intermediation services take shape in five primary ways:
    1. currency transformation and selling;
    2. denomination divisibility (large transactions pool);
    3. reduced currency-related risks, which corresponds to credit risk diversification;
    4. Obtained maturity, resulting in investors protection;
    5. Greater liquidity due large funds accumulation.