THEORY SUMMARY

15082 Words Mar 10th, 2015 61 Pages
BMCF 5103 CORPORATE FINANCE Dr. Nguyen Thi Hoang Anh
Lecture 1: An Introduction to Corporate Finance

Contents

What is finance?
What is corporate finance?
The balance-sheet model of the firm
Capital budgeting
Capitalstructure
The firm and thefinancial markets
Forms of business organisation
The goals of a corporation
Agency relationships: stockholders versusmanagers, stockholders versus creditors
Managers’ actions to maximise stockholder wealth
Financial management and the firm

Reading

Brigham, E., and J. Houston, 2007, Fundamentalsof Financial Management, 11thedition,South-Western. Chapter 1.
Ross, S., Westerfield, R. andJaffe(2010),Corporate Finance, 9thedition, McGraw−Hill, Chapter 1.
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The firm and the financialmarkets

(A) Firm issues securities to raise cash (the financing decision).
(B) Firm invests in assets
(capitalbudgeting).
(C) Firm’s operations generate cash flow.
(D) Cash is paid to government astaxes.
(E) Retained cash flows are reinvested in firm.
(F) Cash is paid out to investors in the form of interest and dividends.

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Forms of business organisation

Sole proprietorship

An unincorporated businessowned by one individual. Advantagesare (1) easy and inexpensive to set up, (2) subject to few government regulations and (3) avoids corporate taxation.Disadvantages are (1) difficult to obtain large amounts ofcapital,(2) unlimitedpersonalliability and (3) life of business constrainedby life of individual

Partnership

An unincorporated business arrangement operated by two or more individuals. Same advantages and disadvantages as sole proprietorship, but added disadvantage that one partner’sliability must be borne by all other partners (although this could be considered an advantage).

Corporation

A legal entity that is separate from its owners and managers.Advantages are (1) unlimited life, (2) easily transferred ownership and(3) limitedliability.Disadvantages are (1)earnings may be subjectto double (both corporate and personal) taxation and (2) setting up and running a corporation is
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