Corporate

Finance
Dr. Quang Nguyen
 Course Materials:
 Required materials
 Ross, S. A. (2021). Fundamentals of Corporate Finance (13th ed.). McGraw-Hill Higher
Education.
 Brealey, R., Myers, S., & Marcus, A. (2022). Fundamentals of Corporate Finance (11th
ed.). McGraw Hill.
 Nguyễn Minh Kiều (2020), Tài chính doanh nghiệp căn bản. NXB Thống kê
 References
 Carbaugh, R. (2018). International Economics (17th ed.). Cengage Learning.
Course Syllabus
Lecture 1: Introduction to Corporate Finance (Chapter 1)
Lecture 2: Financial Statements and Cash Flow (Chapter 2)
Lecture 3: Financial Statements Analysis (Chapter 3)
Lecture 4: Long-term Financial Planning Models (Chapter 3)
Lecture 5: Time Value of Money (Chapter 4)
Lecture 6: Bond and Stock Valuation (Chapter 8 & 9)
Lecture 7: Net Present Value and Other Investment Rules
(Chapter 5)
Lecture 8: Making Capital Investment Decisions (Chapter 6)
Lecture 9: Risk and Return (Chapter 10)
Lecture 10: Cost of Capital (Chapter 13)
Lecture 11: Cash Management and Short-term Finance
(Chapter 26 & 27)
Lecture 12: Credit and Inventory Management (Chapter 28)
 Course Evaluation:
 Assessment  Final exam:
 Individual assignment: 5%  Time: 90 mins
 Class attendence: 5%  MCQs: 25
 Mid-term exams: 10%  Exercises & short-answer question:
 Group work: 10% 4
 Final exam: 60%
 Chapter 1
Introduction to Corporate Finance
 Chapter objectives
 After studying this chapter, you should be
able to:
 Understand different forms of business
organization.
 Focus on the shareholders’ wealth
maximization principles as an operationally
desirable finance decision criterion.
 Explain F.M functions and its interaction with
other management functions.
 Introduction to Corporate Finance

1.1.CORPORATE 1.2.FORM OF BUSINESS 1.3.THE GOALS OF 1.4. FUNCTIONS OF

FINANCE &FINANCIAL ORGANIZATION FINANCIAL FINANCIAL
MANAGER MANAGEMENT MANAGEMENT
1.1 Corporate Finance & Financial Manager

1.1.1.WHAT IS 1.1.2.WHAT IS
CORPORATE FINANCE? FINANCIAL MANAGER?
  According to Cambridge Dictionary:
“corporate finance [uncountable]: the process
of providing companies with money to invest in
1.1.1 What is their businesses”

Corporate According to Investopedia:



“Corporate finance is the subfield of finance

Finance? that deals with how corporations address funding
sources, capital structuring, accounting, and
investment decisions.”
  Corporate finance attempts to find the answers
to the following questions:
 What long-term investments should the business

1.1.1 What is take on?

THE INVESTMENT DECISION
Corporate  How can finance be obtained to pay for the
required investments? Your own or else?
Finance? THE FINANCE DECISION
 How to manage everyday financial activities :
cash, inventory, receivables …
THE WORKING CAPITAL DECISION
  Financial managers try to answer some or all
of these questions.

1.1.2 The The top financial manager within a firm is



usually the General Manager–Finance.

Financial  Corporate Treasurer or Financial Manager
oversees cash management, credit
Manager management, capital expenditures and financial
planning.
 Accountant oversees taxes, cost accounting,
financial accounting and data processing.
 COMPARISON
CFO: Chief financial manager CAO: Chief accounting officers
Organizational
Chart
 CFOs’ Earning

Total
Compensatio
Company CFO Year Salary n
Alphabet Inc. Ruth Porat 2020 $650,000 $47.29 million
Apple Inc. Luca Maestri  2020 $1,000,000 $26.51 million
Facebook Inc. David Wehner 2020 $753,846  $19.69 million
Intel Corp. Robert Swan  2020 $898,000  $16.71 million
Anaplan Inc. David Morton  2020 $137,980 $16.06 million
The Role of
Financial Manager

 Raising of Funds
 Allocation of Funds
 Profit Planning
 Understanding Capital
Markets
1.2 Forms of Business Organization
1.2 Forms of Business Organization
Limited-
liability
company (Công
ty trách nhiệm
hữu hạn)

Private
State-owned
enterprise/sole
company
proprietorship
(Doanh nghiệp
(Doanh nghiệp
nhà nước)
tư nhân)

Joint-stock Partnership
company (Công company (Công
ty cổ phần) ty hợp danh)
1.2 Forms of Business Organization
 1.2 Forms of Business Organization
Ownership Ease of Ability to Management Personal Income Tax Transfer of Dissolution
Form Formation Raise Funds Liability Treatment Ownership
Individual Simple and Limited Flexible, Unlimited Single Simple and Excellent
(Sole inexpensive independent, inexpensive
proprietorship) may lack
expertise
General Moderately Limited but Designated Unlimited Single Poor Fairly simple
Partnership easy superior to partners
individual
ownership

Limited Moderately Limited but General Limited for Single Poor for Time
Partnership difficult and superior to partners or limited general consuming
expensive general agents partners partners
partnership
Corporation Complex Good Usually Limited Double Superior Simple but
and separate from needs
expensive ownership shareholders’
approval
 Corporation (joint stock company)
 1. Division of capital into shares. The capital of a company is divided into shares of
small denominations (mệnh giá) which are readily transferable from one owner to
another
 2. Limited Liability. The liability of the members is generally limited to the extent of
the face value of the shares that a person has agreed to take up. Whatever may happen
to the company and whatever may be the state of solvency of the company, his total
liability does not exceed the face value of the share (For example 10k VND).
 3. Separation of ownership from management. All the shareholders do not manage
the company themselves, but they leave the management into the hands of their
representative and trustees, i.e,. the Board of Directors.
 Question
 Advantages and disadvantages of each form?
 1.3.Goals
 Maximization of profit
 Maximization of shareholders’ wealth
 Maximization of profit
 Most people have been taught that the goal of the firm is to maximize current
profits
 This goal is inadequate for at least three reasons:
 It ignores the time value of money
 It ignores risk
 It assumes Perfect Competition
 It ignores Social Responsibility
 Maximizing EPS
 Ignore time and risk of the expected benefit
 Market value is not a function of EPS. Hence maximizing EPS will
not result in highest price for company & shares
 Maximizing EPS implies that the firm should make no dividend
payments so long as funds can be invested at positive rate of return
—such a policy may not always work
Maximization of Shareholders’ wealth (MSW)
 The correct goal of the firm is to maximize shareholder wealth (i.e.,
shareholder’s equity) or, equivalently, to maximize the firm’s stock
price.
 By this we mean to imply that the managers of the firm work for
the shareholders
 For this reason, they have a duty to make investments that are
expected to increase shareholder wealth
MSW (cont.)

 Shareholders’ wealth
= Current stock
price * Numbers of
Share Outstanding.
 MSW also includes
Social
Responsibility
 Social Responsibility
 Google:
 data centers using 50% less energy than others in the world
 Coca-Cola:
 Making packaging 100% recyclable and replacing all water used in creating their
drinks back to the environment to ensure water security
 Netflix & Spotify:
 52 weeks of paid parental leave to the birth parent and non-birth parent
 QUESTION
 Do Managers Act in Shareholders’ Interests?
 Answer
The answer to this will depend on many factors:
 How closely management goals are aligned with
shareholder goals
 The ease with which management can be replaced if
it does not act in shareholders’ best interests.
 Agency Problem/Conflict
 The conflict between the interest of shareholders and
managers or shareholders and creditors is called agency
problem/conflict and it results into agency cost.
 Agency Cost: it includes all cost borne by the shareholders
to encourage managers to maximize the firms stock price
rather than act in their own self-interest.
 Stockholders Vs Managers
 Managerial Compensation
 Direct intervention by shareholders
 The threat of firing
 The threat of takeover. Hostile takeovers
 Alignment of Goals
The conflict of interests is limited due to:
 Management compensation schemes
 Monitoring of management
 The threat of takeover
 Other stakeholders.
Elon Musk’s
compensation
package
 Each tranche of
options entitle Musk to
buy up to 1,688,670
shares of Tesla stock at
a price of $350.02 per
share
 1.4. Functions of financial management
Functions of financial management is to study and
implement:
(1) Investment decision
(2) Financing decision and
(3) Dividend decision
 1.4.1. Investment decisions
 Capital budgeting
 Working capital management
 1.1.4.1. Capital budgeting
 Capital budgeting is the planning and control of cash outflows in the
expectation of deriving future cash inflows from investments in non-
current assets.
 Involves evaluating the:
 size of future cash flows
 timing of future cash flows
 risk of future cash flows.
 Cash Flow Size

 Accounting income does not mean

cash flow.
 For example, a sale is recorded at the
time of sale and a cost is recorded
when it is incurred, not when the cash
is exchanged.
 Cash Flow Timing
 A dollar today is worth more than
a dollar at some future date.
 There is a trade-off between the
size of an investment’s cash flow
and when the cash flow is
received.
 Cash Flow Timing
Future Cash Flows
Year Project A Project B
1 $0 $20,000
2 $10,000 $10,000
3 $20,000 $0
Total $30,000 $30,000
 Cash Flow Risk
 The role of the financial manager is to deal with the
uncertainty associated with investment decisions.
 Assessing the risk associated with the size and timing
of expected future cash flows is critical to investment
decisions.
 Cash Flow Risk
Future Cash Flows
Year Pessimistic Expected Optimistic
Project 1 $200,000 $300,000 $400,000
Project 2 $100,000 $300,000 $600,000
 1.1.4.2.Working Capital Management
 How much cash and inventory should be kept on hand?
 Should credit terms be extended? If so, what are the
conditions?
 How is short-term financing acquired?
 1.4.2.Financing decisions
The financing decisions are basically concerned with the answers
to following questions:
 What should be the amount of the funds that should be raised?
 What should be mix of equity and debt capital in which the
required amount of funds should be raised? (capital structure)
1.4.3.Dividend
Decision
 Involves the decision of
whether to pay a dividend
to shareholders or maintain
the funds within the firm
for internal growth.
 Factors important to this
decision include growth
opportunities, taxation and
shareholders’ preferences.
 Summary
Financial Management

Maximization of Share Value

Financial Decisions

Liquidity
Investment Financing Dividend Managemen
t
Financial Markets
and the Corporation

 A. Firm issues securities to

raise cash
 B. Firms invests in assets
 C. Firm’s operation generate
cash flow
 D. Reinvested cash flows are
plowed back into firm.
 E. Cash is paid to government
as taxes
 F. Cash is paid out to debtors,
shareholders.
 Primary Market vs. Secondary Market
 Primary market  Secondary market
 The corporation is the  Owners or creditors are the
seller sellers
 Public offering and private  Transferring ownership
placement  Stock buyback?
 Underwriters?
 Dealer vs. Auction Markets
 Dealer markets  Auction markets (exchange)
 Buy and sell for themselves  Physical location (like Wall
at their own risk Street, HNX or HOSE)
 OTC (over-the-counter)  Match those wish to sell
 Brokers and agents match and those wish to buy
buyers and sellers  Market maker?
Separation of Ownership and Control