Corporate Finance Overview

Study Notes

Corporate finance concerns key financial decisions that influence a company's growth and profitability.
Three critical aspects of corporate finance include:
- Investment Decisions: What long-term investments should the company pursue?
- Financing Decisions: How should the company finance these investments?
- Working Capital Management: How should the company manage its day-to-day financial operations?

Financial managers in large corporations are responsible for making financial decisions in the best interests of shareholders.
They often occupy positions like CFO or vice president of finance, overseeing treasurer and controller functions.
Key decisions made by financial managers include:
- Capital Budgeting: Evaluating and selecting long-term investments.
- Capital Structure: Determining the mix of debt and equity financing.
- Working Capital Management: Managing short-term assets and liabilities.

Sole Proprietorship: A business owned by a single individual with unlimited personal liability. It is simple but limited in growth potential.
Partnership: Owned by two or more individuals, with shared profits and liabilities. Partnerships can be general or limited.
Corporation: A legal entity separate from its owners offering limited liability, easy ownership transfer, and greater capacity to raise capital. However, it faces double taxation on profits.

The primary goal of financial management is to maximize shareholder value. This means increasing the market value of the firm's stock.
While other goals like maximizing profits, sales, or market share are important, they are secondary to creating long-term value for shareholders.

Agency Problem: A potential conflict of interest arises when managers, who act as agents for shareholders, might prioritize personal goals over shareholder interests. This is more pronounced in large corporations with widely dispersed ownership.
Agency Costs: Include both direct costs (excessive management perks, monitoring costs) and indirect costs (missed profitable opportunities) stemming from the agency problem.
Alignment Tools: To align management interests with shareholders, compensation is often linked to financial performance and stock value.
Oversight Mechanisms: Stockholders use tools like board elections, proxy fights, and takeovers to monitor management. Other stakeholders like employees and creditors also influence the dynamic.

Financial markets enable the transfer of ownership and help corporations raise capital through debt and equity.
Primary Market: Involves direct transactions between corporations and investors, like IPOs.
Secondary Market: Facilitates the trading of existing securities among investors, providing liquidity. This includes auction markets (e.g., NYSE) and dealer markets (e.g., NASDAQ), each with different trading mechanisms.
Global Operation and Listing Requirements: Financial markets operate globally with continuous trading. Listing on exchanges like the NYSE requires meeting specific criteria for stability and transparency.