Advanced Corporate Finance Study Guide
Chapter 1
Corporate Finance- the acquisition and efficient use of funds required by the fund
The acquisition refers to the finance decision
Efficient use of funds refers to the investment decision
A major aspect of corporate finance is the creation and determination of value
Objective of Financial Management- Maximize shareholder wealth is the main goal—to maximize the market value of the firm
3 Main Decision Areas of Financial Manager to Achieve Maximization:
1. Investment Decision- What long-term investments should the firm take?
2. Financing Decision- How can the firm finance these investments? What is the optimal amount of debt vs. equity that a firm should use to finance these investments?
3. Dividend Decision- How much of the firms earnings should be paid out as dividends? (Growth of the firm is a major factor)
*****These 3 decisions combined determine the value of the firm
Determinants of Market Value of the Firm
Investment, Financing and Dividend decisions affect the value of the firm and the firm’s stock price
External Factors that affect the value of the firm that the manager has no control over
Economic Environment- whether the firm is operating in a recessionary or expansionary market
Competition- within the industry
Taxes- tax environment
Government Regulations- affects banking and utility industry more heavily than others
****Those factors affect the future cash flows of the firm and the level of risk the firms face
****The level of risk and future cash flows determine the market value of the firm’s stock
Stock Price of the firm is the present value of the expect future cash flows of the firm
Present Value takes into account:
Uncertainty of future cash flows
Timing of cash flows
Compensation for tying up investor’s money (opportunity cost- investors could be investors in other stocks/firms in similar risks, take account of return that could be returned from similar investments)
Account Profit ignores- risk, timing of
Corporate Finance- the acquisition and efficient use of funds required by the fund
The acquisition refers to the finance decision
Efficient use of funds refers to the investment decision
A major aspect of corporate finance is the creation and determination of value
Objective of Financial Management- Maximize shareholder wealth is the main goal—to maximize the market value of the firm
3 Main Decision Areas of Financial Manager to Achieve Maximization:
1. Investment Decision- What long-term investments should the firm take?
2. Financing Decision- How can the firm finance these investments? What is the optimal amount of debt vs. equity that a firm should use to finance these investments?
3. Dividend Decision- How much of the firms earnings should be paid out as dividends? (Growth of the firm is a major factor)
*****These 3 decisions combined determine the value of the firm
Determinants of Market Value of the Firm
Investment, Financing and Dividend decisions affect the value of the firm and the firm’s stock price
External Factors that affect the value of the firm that the manager has no control over
Economic Environment- whether the firm is operating in a recessionary or expansionary market
Competition- within the industry
Taxes- tax environment
Government Regulations- affects banking and utility industry more heavily than others
****Those factors affect the future cash flows of the firm and the level of risk the firms face
****The level of risk and future cash flows determine the market value of the firm’s stock
Stock Price of the firm is the present value of the expect future cash flows of the firm
Present Value takes into account:
Uncertainty of future cash flows
Timing of cash flows
Compensation for tying up investor’s money (opportunity cost- investors could be investors in other stocks/firms in similar risks, take account of return that could be returned from similar investments)
Account Profit ignores- risk, timing of