Essentials Of Corporate Finance PDF

ESSENTIALS OF CORPORATE FINANCE Book By Stephen Ross, Randolph Westerfield and Bradford Jordan INTRODUCTION TO CORPORATE FINANCE Overview: Corporate finance focuses on making key financial decisions that drive a company’s growth and profitability. This cha...

ESSENTIALS OF CORPORATE FINANCE Book By Stephen Ross, Randolph Westerfield and Bradford Jordan INTRODUCTION TO CORPORATE FINANCE Overview: Corporate finance focuses on making key financial decisions that drive a company’s growth and profitability. This chapter introduces fundamental concepts in corporate finance, including the roles and responsibilities of financial managers, the objectives of financial management, and the different forms of business organization. Key Learning Objectives: 1. Understand the basic financial management decisions. 2. Comprehend the goal of financial management. 3. Recognize the financial implications of different business structures. 4. Identify potential conflicts of interest between managers and CORPORATE FINANCE AND THE FINANCIAL MANAGER: 1. What is Corporate Finance?  Corporate finance revolves around three main questions:  Investment Decisions: What long-term investments should the company undertake?  Financing Decisions: How should the company finance these investments?  Working Capital Management: How should the company manage its day-to-day financial operations? 2. The Role of the Financial Manager: In large corporations, financial managers are tasked with making decisions on behalf of shareholders. They typically hold positions like CFO or vice president of finance and oversee 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. FORMS OF BUSINESS ORGANIZATION: Sole Proprietorship: A business owned by a single individual with unlimited liability. This form is simple but limited in growth potential. Partnership: A business owned by two or more individuals. Partnerships can be general or limited, with shared profits and liabilities. Corporation: A legal entity separate from its owners, offering limited liability, ease of ownership transfer, and greater capacity to raise capital. However, it faces double taxation on profits. THE GOAL OF FINANCIAL MANAGEMENT: The primary goal is to maximize the value for shareholders. This can be defined as 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. THE AGENCY PROBLEM AND CONTROL OF THE CORPORATION Agency Problem: Management may pursue personal goals over stockholders' interests due to the spread-out ownership in large corporations. Agency Costs: Costs include both direct (excessive management perks, monitoring costs) and indirect (missed profitable opportunities). Alignment Tools: Management compensation is tied to financial performance and stock value to align their interests with stockholders. Oversight Mechanisms: Stockholders use tools like board elections, proxy fights, and takeovers to monitor management, while other stakeholders also influence the dynamic. FINANCIAL MARKETS AND THE CORPORATION Role in Corporate Finance: Financial markets enable the transfer of ownership and help corporations raise capital through debt and equity. Primary vs. Secondary Markets: Primary markets involve direct transactions between corporations and investors, while secondary markets facilitate the trading of existing securities among investors, providing liquidity. Types of Markets: Secondary markets include auction markets (e.g., NYSE) and dealer markets (e.g., NASDAQ), each with different mechanisms for trading securities. Global Operation and Listing Requirements: Financial markets operate globally with continuous trading, and listing on exchanges like the NYSE requires meeting specific criteria for stability and