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1、McGraw-Hill/IrwinCorporate Finance, 7/eMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-2CHAPTER1Introduction to Corporate Finance.highered.mcgraw- Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-3Chapter Outline1.1 What is Co
2、rporate Finance?1.2 Corporate Securities as Contingent Claims on Total Firm Value1.3 The Corporate Firm1.4 Goals of the Corporate Firm1.5 Financial Markets1.6 Outline of the TextMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-4What is Corporate Fina
3、nce?Corporate Finance addresses the following three questions:1.What long-term investments should the firm engage in?2.How can the firm raise the money for the required investments?3.How much short-term cash flow does a company need to pay its bills?McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The M
4、cGraw-Hill Companies, Inc. All Rights Reserved.1-5The Balance-Sheet Modelof the FirmCurrent AssetsFixed Assets1 Tangible2 IntangibleTotal Value of Assets:Shareholders EquityCurrent LiabilitiesLong-Term DebtTotal Firm Value to Investors:McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Com
5、panies, Inc. All Rights Reserved.1-6The Balance-Sheet Modelof the FirmCurrent AssetsFixed Assets1 Tangible2 IntangibleShareholders EquityCurrent LiabilitiesLong-Term DebtWhat long-term investments should the firm engage in?The Capital Budgeting DecisionMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 Th
6、e McGraw-Hill Companies, Inc. All Rights Reserved.1-7The Balance-Sheet Modelof the FirmHow can the firm raise the money for the required investments?The Capital Structure DecisionCurrent AssetsFixed Assets1 Tangible2 IntangibleShareholders EquityCurrent LiabilitiesLong-Term DebtMcGraw-Hill/IrwinCorp
7、orate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-8The Balance-Sheet Modelof the FirmHow much short-term cash flow does a company need to pay its bills?The Net Working Capital Investment DecisionNet Working CapitalShareholders EquityCurrent LiabilitiesCurrent AssetsFixed
8、Assets1 Tangible2 IntangibleLong-Term DebtMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-9Capital StructureThe value of the firm can be thought of as a pie,it will depend on how well the firm has made its investment decisionThe goal of the manager
9、is to increase the size of the pie.The Capital Structure decision can be viewed as how best to slice up a the pie.If how you slice the pie affects the size of the pie, then the capital structure decision matters.50% Debt50% Equity25% Debt75% Equity70% Debt30% EquityMcGraw-Hill/IrwinCorporate Finance
10、, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-10Hypothetical Organization ChartChairman of the Board and Chief Executive Officer (CEO)Board of DirectorsPresident and Chief Operating Officer (COO)Vice President and Chief Financial Officer (CFO)TreasurerControllerCash ManagerCapital
11、 ExpendituresCredit ManagerFinancial PlanningTax ManagerFinancial AccountingCost Accounting Data Processing McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-11The Financial ManagerTo create value, the financial manager should:1.Try to make smart inve
12、stment decisions.2.Try to make smart financing decisions.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-12Cash flowfrom firm (C)The Firm and the Financial MarketsTaxes (D)FirmGovernmentFirm issues securities (A)Retained cash flows (F)Investsin asse
13、ts(B)Dividends anddebt payments (E)Current assetsFixed assetsFinancialmarketsShort-term debtLong-term debtEquity sharesUltimately, the firm must be a cash generating activity.The cash flows from the firm must exceed the cash flows from the financial markets.McGraw-Hill/IrwinCorporate Finance, 7/e 20
14、05 The McGraw-Hill Companies, Inc. All Rights Reserved.1-13Multiple choice1.Which of the following is not considered one of the basic questions of corporate finance? A)What long-lived assets should the firm invest? B)How much inventory should the firm hold? C)How can the firm raise cash for required
15、 capital expenditures? D)How should the short-term operating cash flows be managed? E)All of the above. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-14Answer: B McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Righ
16、ts Reserved.1-152.The balance sheet is made up of what five key components? A)Fixed assets, current liabilities, long term debt, tangible current assets and shareholders equity B)Intangible fixed assets, current liabilities, long-term debt, net income and current assets C)Fixed assets, long-term deb
17、t, current assets, current liabilities and shareholders equity D)Current assets, fixed assets, long term debt, shareholders equity and retained earnings E)None of the above. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-16Answer: C McGraw-Hill/Irw
18、inCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-173. Capital structure is defined as the major financing of the firm. The capital structure is divided A)between debtors and creditors. B)creditors and shareholders. C)assets and liabilities. D)All of the above. E)No
19、ne of the above. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-18Answer: B McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-194. In the managerial structure of the corporation the two officers and
20、their responsibilities that report directly to the Chief Financial Officer (CFO) are A)the credit manager who handles accounts receivable and the tax manager who minimizes tax payments. B)the personnel manager who manages salaries and compensation, and the production operations manager who manages f
21、acility operations. C)the treasurer who is responsible handling cash flow and making financial decisions and the tax manager who minimizes tax payments. D)the controller who manages the accounting function and the treasurer who is responsible handling cash flow and making financial decisions. E)None
22、 of the above. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-20Answer: D McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-211.2 Corporate Securities as Contingent Claims on Total Firm ValueThe basi
23、c feature of a debt is that it is a promise by the borrowing firm to repay a fixed dollar amount of by a certain date.The shareholders claim on firm value is the residual amount that remains after the debtholders are paid.If the value of the firm is less than the amount promised to the debtholders,
24、the shareholders get nothing.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-22Debt and Equity as Contingent Claims$F$FPayoff to debt holdersValue of the firm (X)Debt holders are promised $F. If the value of the firm is less than $F, they get the wh
25、atever the firm if worth. If the value of the firm is more than $F, debt holders get a maximum of $F. $FPayoff to shareholdersValue of the firm (X)If the value of the firm is less than $F, share holders get nothing. If the value of the firm is more than $F, share holders get everything above $F. Alg
26、ebraically, the bondholders claim is: Min$F,$XAlgebraically, the shareholders claim is: Max0,$X $FMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-23$F$FCombined Payoffs to debt holders and shareholdersValue of the firm (X)Debt holders are promised $
27、F. Payoff to debt holdersPayoff to shareholdersIf the value of the firm is less than $F, the shareholders claim is: Max0,$X $F = $0 and the debt holders claim is Min$F,$X = $X. The sum of these is = $XIf the value of the firm is more than $F, the shareholders claim is: Max0,$X $F = $X $F and the deb
28、t holders claim is: Min$F,$X = $F. The sum of these is = $XCombined Payoffs to Debt and EquityMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-24Example1 Suppose debtholders are promised $100,the firms value is $75, how much will the debtholders and
29、stockholders get? McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-25In this case, the debtholders will get $75=min(75,100), the stockholders will get nothing! The stockholders claim= max(0,75-100)=0McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The Mc
30、Graw-Hill Companies, Inc. All Rights Reserved.1-26Example 2If the firms value is $200,the firm has promised to pay the debtholder $100, how much will the debtholder and stockholders get?McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-27The debtholde
31、r will get $100=min(100,200), the stockholders will get $100=max0,(200-100).McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-28Multiple choiceThe Simple Corporation has outstanding obligation to the Complex Corporation of $250. It is year-end and the
32、 total cash flow of Simple from all sources is $325. The contingent payoff to the debtholders and the shareholders is A)$250; $325 B)$75; $250 C)$250; $75 D)$325; $250 E)None of the above. McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-29Answer: C
33、McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-301.3 The Corporate FirmThe corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.However, businesses can take other forms.McGraw-Hill/
34、IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-31Forms of Business OrganizationThe Sole Proprietorship(p10) A sole proprietorship is a business owned by one person.The Partnership:any two or more persons can get together and form a partnership.General Partners
35、hip: all partners agree to provide some fraction of work and cash and to share the profits and lossesLimited Partnership: permit the liability of some of the partners to be limited to the amount of cash each has contributed to the partnershipMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hi
36、ll Companies, Inc. All Rights Reserved.1-32The CorporationA corpotation is a legal entity, it can have a name and enjoy many of the legal power of natural persons( enter into contracts and may sue and be sued)Advantages Liquidity and Marketability of Ownership: ownership can be readily transfererred
37、 Liability: limited liabilityContinuity of Existence: unlimited lifeDisadvantagesTax Considerations:double taxationMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-33A Comparison of Partnershipand Corporations(p13) CorporationPartnershipLiquidityShar
38、es can easily be exchanged.Subject to substantial restrictions.Voting RightsUsually each share gets one voteGeneral Partner is in charge; limited partners may have some voting rights.TaxationDoublePartners pay taxes on distributions.Reinvestment and dividend payoutBroad latitudeAll net cash flow is
39、distributed to partners.LiabilityLimited liabilityGeneral partners may have unlimited liability. Limited partners enjoy limited liability.Continuity Perpetual lifeLimited lifeMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-341.4 Goals of the Corpora
40、te FirmThe traditional answer is that the managers of the corporation are obliged to make efforts to maximize shareholder wealth.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-35The Set-of-Contracts PerspectiveTheorganisationInterest groupInvestor
41、The publicSuppliers Government Media Consumers IndustrybodiesEmployees McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-36The Set-of-Contracts PerspectiveThe firm can be viewed as a set of contracts.One of these contracts is between shareholders and
42、managers.The managers will usually act in the shareholders interests.The shareholders can devise contracts that align the incentives of the managers with the goals of the shareholders.The shareholders can monitor the managers behavior.This contracting and monitoring is costly.McGraw-Hill/IrwinCorpor
43、ate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-37Agency costsThe cost of resolving the conflicts of interest between managers and shareholders are called agency costs.These costs are defined as the sum of (1) the monitoring costs of the shareholders and (2) the costs of
44、implementing control devices.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-38Managerial GoalsManagerial goals may be different from shareholder goalsWillimson proposes the notion of Expensive preference: managers obtain value from certain kinds of
45、 expenses.According to Donaldson: Survival IndependenceThe basic financial objective of managers is the maximization of corporate wealth.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-39Separation of Ownership and ControlBoard of DirectorsManagemen
46、tAssetsDebtEquityShareholdersDebtholdersMcGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-40Do Shareholders ControlManagerial Behavior?(p16)Shareholders vote for the board of directors, who in turn hire the management team.Contracts can be carefully c
47、onstructed to be incentive compatible.There is a market for managerial talentthis may provide market discipline to the managersthey can be replaced.If the managers fail to maximize share price, they may be replaced in a hostile takeover.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Co
48、mpanies, Inc. All Rights Reserved.1-411.5 Financial MarketsThe financial markets are composed of the money markets and the capital markets.Money markets are the markets for debt securities that will pay off in the short term( usually less than one year).Capital markets are the markets for long-term
49、debt (with a maturity at over one year) and for equity shares.McGraw-Hill/IrwinCorporate Finance, 7/e 2005 The McGraw-Hill Companies, Inc. All Rights Reserved.1-421.5 Financial MarketsThe financial markets can be classified further as the primary market and the secondary markets.Primary MarketWhen a
50、 corporation issues securities, cash flows from investors to the firm.Usually an underwriter is involvedSecondary Markets Involve the sale of “used” securities from one investor to another . There are two kinds of secondary markets: the auction markets and the dealer markets.The equity securities of