Scope of Corporate Finance

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The Scope Of Corporate Finance

Professor Dr. Rainer Stachuletz Corporate Finance
Berlin School of Economics

Finance Career Opportunities
Corporate Finance
• Budgeting, financial forecasting, cash management, credit administration, investment analysis, fund procurement

Commercial Banking Investment Banking Money Management
2

• Consumer banking • Corporate banking
• High income potential • Very competitive industry

• Opportunities in investment advisory firms, mutual fund companies, pension funds, investment arms of financial departments • Advise on business practices and strategies of corporate clients Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

Consulting

Raising Capital: Key Facts
Most financing comes from internal rather than external sources (“pecking order”). Most external financing issued as debt

Primary vs. secondary market transactions or offerings Traditional financial intermediaries (banks) declining as a source of capital for large firms 3

Securities markets growing in importance
Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

Growth in Global Security Issues,

1990-2003

$ Bn
6000

5000

4000

Global debt & equity
3000

2000

U.S. Issuers worldwide
1000

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

4

Role of The Financial Manager
(2) (1)

Firm's operations
(3)

Financial manager

(4a)

Financial markets

(4b)
(1) Cash raised from investors (2) Cash invested in firm

(3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors 5
Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

Corporate Finance Functions
External Financing

Capital Budgeting

Corporate Finance Functions

Financial Management

Risk Management

Corporate Governance
6
Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

Dimensions of the External Financing Function Equity vs. debt

Funding via capital market vs. via financial intermediary Public vs. private capital markets Going public 7
Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

The Capital Budgeting Function

Capital Budgeting – the process firms use to choose the set of investments that generate the most wealth for shareholders

Select investments for which the marginal benefits exceed the marginal costs. 8
Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

The Financial Management Function
Managing daily cash inflows and outflows
Forecasting cash balances Building long-term financial plans Choosing the right mix of debt and equity 9
Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

The Risk Management Function
Managing the firm’s exposure to significant risks:
Interest rate risk Exchange rate risk Commodity price risk
10
Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

The Corporate Governance Function
Ensuring that managers pursue shareholders’ objectives
• • • • •

Dimensions of corporate governance

Boards of directors Ownership structures Capital structures Compensation plans Country’s legal environment - in U.S. Sarbanes-Oxley Act of 2002

11

Takeover market disciplines firms that don’t govern themselves. Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

What Should Managers Maximize?
• Profit maximization as goal:
– Does not account for timing of returns – Profits - not necessarily cash flows – Ignores risk

Maximize shareholder wealth
• Maximize stock price, not profits • Accounts for risk • As “residual claimants,” shareholders have better incentives to force management to maximize firm value than do other stakeholders. Prof. Dr. Rainer Stachuletz Corporate Finance Berlin School of Economics

12...
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