Tbs907 Autumn2012 Lectures Chapter 1

Chapter 1

Principles of Corporate Finance
Tenth Edition

Goals and Governance of the Firm
Slides by Matthew Will

McGraw-Hill/Irwin

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

1-2

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

1-3

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

1-4

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

Investment and Financing Decisions
Investment decision
– purchase of real assets

1-5

Financing decision
– sale of financial assets

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

1-6

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

Investment and Financing Decisions
– “Capital Budgeting”

1-7

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