Intro to Finance SF 2024 Lecture 1 - Introduction PDF

BUU22550 Introduction to Finance 2024/2025 Professor Martha O’Hagan [email protected] Lecture 1: Introduction 1  Lectures & Tutorials 2 Lectures per week Wednesday 11am & Friday 12pm Try to arrive 5 minutes before the hour....

BUU22550 Introduction to Finance 2024/2025 Professor Martha O’Hagan [email protected] Lecture 1: Introduction 1  Lectures & Tutorials 2 Lectures per week Wednesday 11am & Friday 12pm Try to arrive 5 minutes before the hour. I begin on the hour and finish at 10 to. 1 tutorial per week, starting next week Teaching Assistants – Laqiqigue Zhu (Zhula), Dylan Kirby, Ruben Ruf, Eimhin O’Neill 2  How to get in touch For queries about lecture material or assessment: Before, during or after lectures, office hours or email [email protected] For queries about tutorial material:  Laqiqige Zhu [email protected]  Dylan Kirby [email protected]  Ruben Ruf [email protected]  Eimhin O’Neill [email protected] 3  Reading Materials Lecture material, tutorial material and readings on Blackboard Schoenmaker and Schramade. Corporate Finance for Long- Term Value, Springer, (open access at S&S textbook) Brealey et al., A. Fundamentals of Corporate Finance, McGraw-Hill (hardcopies in the library, Click to access ebook) The Economist: http://search.proquest.com/publication/41716 The Financial Times : https://www-ft-com.elib.tcd.ie/ 4  Assessment In person test: 20% (in the week of 4th November) Final year exam: 80% (see TCD academic calendar for assessment dates Schol exams – January 2025 5  Quick Overview of the Course The Objective of the Company Corporate Governance Time Value of Money Valuing Bonds Valuing Equity Capital Budgeting (what investments to make) The Cost of Capital and Capital Structure (how to finance the firm) Dividend Policy (how to reward investors) 6  Decisions for the Chief Financial Officer (CFO) Investment Decisions -Capital budgeting What long-term investments should the firm make? Financing Decisions -Cost of Capital/Capital structure How much should be financed by debt or equity? Dividend Policy Decisions How should the firm return value to shareholders and other stakeholders? 7  What should the goal of a company be?  Maximize profit/Minimize costs/Maximize market share?  Maximize the current value of the company’s stock?  To create value? What value?  Financial Value (FV), Social Value (SV), Environmental Value (EV)  Why SV and EV? – see S&S Chapter 1 Kate Raworth Doughnut Economics What is value, value to whom? 8 What should the goal of a corporation be? Shareholder Model – Milton Friedman 1970s. Maximize FV, i.e. owner wealth Refined Shareholder Model – Max FV, incorporating SV and EV to the extent that they affect FV Stakeholder Model – Edward Freeman 1984 – consider current stakeholders - financial agents (equity and debt) and social agents (employees, customers, suppliers) Integrated Model – balance profit (FV) and impact (SV and EV) for the long term, current and future stakeholders 9 “Ever since businesses were granted limited liability in Britain and France in the 19th century, there have been arguments about what society can expect in return. In the 1950s and 1960s America and Europe experimented with managerial capitalism, in which giant firms worked with the government and unions and offered workers job security and perks. But after the stagnation of the 1970s shareholder value took hold, as firms sought to maximise the wealth of their owners and, in theory, thereby maximised efficiency. Unions declined, and shareholder value conquered America, then Europe and Japan… The Economist 22nd August 2019, What companies are for. 10 It is this framework that is under assault. Part of the attack is about a perceived decline in business ethics, from bankers demanding bonuses and bail- outs both at the same time, to the sale of billions of opioid pills to addicts. But the main complaint is that shareholder value produces bad economic outcomes. Publicly listed firms are accused of a list of sins, from obsessing about short-term earnings to neglecting investment, exploiting staff, depressing wages and failing to pay for the catastrophic externalities they create, in particular pollution.” The Economist 22nd August 2019, What companies are for. 11 In 1965, CEOs of big US companies were awarded pay packages worth about 15 times that of the typical non-managerial worker, according to the Economic Policy Institute. Today, the ratio is well over 200 to 1. 12  Corporate Governance Corporate Governance is about controlling and directing the company. There are two related problems with corporate governance 1.Asymmetric information (insiders v outsiders) 2.Agency problems between management (agents) and stakeholders (principles) As corporate ownership varies around the world, these challenges differ in different contexts. But corporate scandals happen everywhere! 13  Agency Problems Also know as the Principal-Agent Problem This problem is aggravated by asymmetric information Do managers really maximize value? Managers are agents for stakeholders, but the managers may act in their own interests rather than maximizing value - empire building, targeting short term-earnings to boost bonus payments etc. 14  Managing Agency Problems 1. Corporate Governance Codes – regulations and business practices historically designed to protect shareholders and other investors, but some are being updated to include other stakeholders e.g. in the Netherlands in the UK Legal requirements (Protection from insider trading, fiduciary duty) Board of directors (approve a dividend, issue securities, approves compensation packages) Boards elected by shareholders (independence of boards) 2. Internal Controls and Decision Making Processes 15 Managing Agency Problems 3. Compensation plans – share options (long term) 4. Activist Shareholders – eg. Engine No 1. and ExxonMobil 5. Information – Financial Disclosure, Monitoring by Equity Analysts 6.Threat of Takeover – should share price becomes depressed enough 16  (Independent) Board of Directors Three tests for an independent board: ¤ Are a majority of the directors outside directors? ¤ Is the chairman of the board independent of the company? (and not the CEO of the company)? ¤ Are the compensation and audit committees composed entirely of outsiders? Often not the case, e.g. the board of VW was deeply dysfunctional 17 Does Corporate Governance Work?  Nestle  Enron  Volkswagen  Wirecard Corporate scandals happen in every country, despite corporate governance codes and efforts to address agency problems…. 18 Forms of Business Organisation  SoleProprietorship or Partnership  Corporation Public Company (shares listed on exchanges) Private Company (owned by families, foundation and private equity, shares not listed)  Cooperation B Corporation  Social Enterprise  Governmental Organisation 19  Sole Proprietorship/Partnership Disadvantages Advantages  Unlimited liability  No separation of  Limited life ownership and  No separation of management  Taxation (profits ownership and management taxed once as  Transfer of income tax)  Less regulation ownership difficult  Raising capital difficult 20  Corporation Advantages Disadvantages  Limited liability  Separation of ownership  Unlimited life and management  Separation of  Double taxation (income ownership and taxed at the corporate management rate and then dividends  Transfer of taxed at the personal rate) ownership is easier  Onerous legal and  Easier to raise regulatory requirements capital 21 Other Forms of Business Organisation  Cooperation – co-operative banks, John Lewis Partnership  B Corporation – Bread 41, Patagonia  Social Enterprise – communities centres, meals on wheels, TOMS  Governmental Organisation – fully state- owned (HSE), semi-states (CIE, RTE) 22  Learning Outcomes What are the main financial management decisions of a corporation? What issues may arise when managers are not the owners of the firm? What steps can be taken to mitigate these issues? Corporate Governance Forms of Business Organisation 23