Tbs907 Autumn2012 Lectures Chapter 1

Topics: Investment, Finance, Economics Pages: 8 (1013 words) Published: December 29, 2012
Chapter 1

Principles of Corporate Finance
Tenth Edition

Goals and Governance of the Firm
Slides by Matthew Will


Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

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


Investment and Financing Decisions
Common Finance Terminology
– Real assets – Financial assets / Securities – Capital markets and financial markets – Investment / capital budgeting – Financing


Investment and Financing Decisions
Real Assets
– Assets used to produce goods and services.


Financial Assets
– Financial claims to the income generated by the firm’s real assets.

Investment and Financing Decisions
Investment decision
– purchase of real assets


Financing decision
– sale of financial assets

Investment and Financing Decisions
Capital Budgeting Decision
– Decision to invest in tangible or intangible assets.


…also called the Investment Decision …also called Capital Expenditures or (CAPEX)

Investment and Financing Decisions
– “Capital Budgeting”


Tangible Assets Expand Stores @ $800 million

Intangible Assets New Drug R&D @ $800 million

Investment and Financing Decisions
Company (revenue in billions for 2007 or 2008) Boeing ($61 billion) Recent Investment Decision Began production of its 787 Dreamliner aircraft, at a forecast cost of more than $10 billion. Recent Financing Decision The cash flow from Boeing’s operations allowed it to repay some of its debt and repurchase $2.8 billion of stock. Royal Dutch Shell ($458 billion) Invests in a $1.5 billion deepwater oil and gas field in the . In 2008 returned $13.1 billion of cash to its stockholders by buying back their shares. (¥26,289 billion) In 2008 opened new engineering and safety testing facilities in . Returned ¥443 billion to shareholders in the form of dividends.


GlaxoSmithKline (£24 billion)

Spent £3.7 billion in 2008 on research and development of new drugs.

Financed R&D expenditures largely with reinvested cash flow generated by sales of pharmaceutical products.

Wal-Mart ($379billion)

In 2008 announced plans to invest over a billion dollars in 90 new stores in .

In 2008 raised $2.5 billion by an issue of 5-year and 30-year bonds.

Union Pacific ($18 billion)

Acquired 315 new locomotives in 2007.

Largely financed its investment in locomotives by long-term leases.

Wells Fargo ($52 billion)

Acquired Wachovia Bank in 2008 for $15.1 billion.

Financed the acquisition by an exchange of shares. Issued a 6-year bond in 2007, raising 300 million Swiss francs.

LVMH (€17 billion )

Acquired the Spanish winery, Bodega Numanthia Termes.

Lenovo ($16 billion)

Expanded its chain of retail stores to cover over 2,000 cities.

Borrowed $400 million for 5 years from a group of banks

Role of The Financial Manager
(2) (1)


Firm's operations

Financial manager


Financial markets


(1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors

Who is The Financial Manager?
Chief Financial Officer




The Investment Trade-off


The Investment Trade-off
Hurdle rate Cost of capital Opportunity cost of capital


Goals of The Corporation
Each stockholder wants three things:
1. To be as rich as possible, that is, to maximize his or her current 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.


Goals of The Corporation
Profit maximization is not a well-defined financial objective, for at...
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