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    Damodaran Intro PDF

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    Juan G Scharffenorth

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    © All Rights Reserved
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    Damodaran Intro PDF

    Uploaded by

    Juan G Scharffenorth
    56 views8 pages

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    Damodaran Intro.pdf

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    Copyright:

    © All Rights Reserved
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    56 views8 pages

    Damodaran Intro PDF

    Uploaded by

    Juan G Scharffenorth

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 8

    An Introduction to Corporate Finance

    Aswath Damodaran

    Aswath Damodaran 1
    The Traditional Accounting Balance Sheet

    The Balance Sheet


    Assets Liabilities
    Current Short-term liabilities of the firm
    Long Lived Real Assets Fixed Assets Liabilties
    Short-lived Assets Current Assets Debt Debt obligations of firm

    Investments in securities & Financial Investments Other


    assets of other firms Liabilities Other long-term obligations

    Assets which are not physical, Intangible Assets


    like patents & trademarks Equity Equity investment in firm

    Aswath Damodaran 2
    The Financial View of the Firm

    Assets Liabilities
    Existing Investments Fixed Claim on cash flows
    Generate cashflows today Assets in Place Debt Little or No role in management
    Includes long lived (fixed) and Fixed Maturity
    short-lived(working Tax Deductible
    capital) assets

    Expected Value that will be Growth Assets Equity Residual Claim on cash flows
    created by future investments Significant Role in management
    Perpetual Lives

    Aswath Damodaran 3
    Aswath Damodaran 4
    The Investment Decision

     Every business has to decide where to allocate scarce resources. Put more
    prosaically, every business has to look at its available investment
    opportunities and decide whether to make the investment or not.
     In making this decision, firms have to grapple with two basic issues.
    • The first is the rate of return that they need to make on an investment, given its
    risk, for it to be a good investment.
    • The second is how to measure returns on investments, especially when the
    cashflows on these investments are different from accounting earnings and vary
    over time.

    Aswath Damodaran 5
    The financing decision

     There are two ways in which any business can raise financing. It can use the
    owner’s funds (equity) or it can borrow money (debt).
     Every business has to consider whether the mix of debt and equity that it uses
    to fund investments is in fact the right one. The financing decision examines
    whether the firm’s existing mix of debt and equity is the right one.
     Firms also have to pick from a variety of different financing choices - short
    term versus long term debt, fixed rate versus floating rate debt- and determine
    what type of financing is best suited for them.

    Aswath Damodaran 6
    The dividend decision

     After firms make investments with their chosen financing mix, the
    investments generate cashflows. When the cashflows come in, firms will have
    to make decisions on how much of these cashflows will be invested back into
    the business and how much returned to the owners of the business.
     In a publicly traded firm, cashflows can be returned either as dividends or by
    buying back stock.

    Aswath Damodaran 7
    It all ties back to value…

     Investment, financing and dividend decisions made by businesses affect the


    values of these businesses.
     In valuation, we attempt to tie inputs into valuation models into basic
    corporate finance decisions. If the objective in corporate finance is to
    maximize firm value, good investment, financing and dividend decisions
    should increase value. Bad decisions should decrease value.

    Aswath Damodaran 8

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