Ch.1, part 1, Intro to corporate finance #Finance

Chapter one, introduction to corporate Finance. In this chapter we have no math, it’s all concepts, very general things about corporate

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance which is what FRL3000 is about. First, we will look at the main three questions in corporate #1a73e8; text-decoration: none;">Finance. Then we will look at forms of business organization, in other words, how the business could be structured, like, you’re the only business owner, or you are in some partnership type business, and so on. Then, the goal of financial

management. Then, the so-called agency problem, what it means, in which form of business organization this is a problem. And how the corporation is controlled. And the last topic is on financial none;">Markets and how a corporation fits in. First, what is corporate Finance? If you imagine a firm, let’s say, a pizza restaurant, then first you can think of

where the money for this business would be coming from. And we can say that there are two sources of Capital, or funds. One source is from the owners, so maybe it’s a partnership. Right? So the owners, the original partners, they each pitched in some amount of money. And

second, the second source of money is maybe the money borrowed, such as a bank Loan. So what happens with this money? Part of it is invested into short-term things, and the rest is invested into long-term Investments. And the money will be working for the firm and

generate even more money. So, the first question is related to where the money is coming from, the cash inflows for thefirm, called Capital structure. The second question is called working Capital management. In other words, how will the firm manage its every-day

activities, such as selling its product to customers, borrowing money short-term, paying to its suppliers? What about any sort of time delays in receiving money when the product is sold to the customers? Things like that. And the third question within corporate

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance is called Capital Budgeting. So this is all related to planning money for a long term project, something that would be running for a number of

years and require costs over a number of years and Profits coming in again over a long term time period. Capital structure can also be called a mixture of Debt and Equity. Debt is money borrowed. Like

Loans. Equity is basically how much something is worth, so something that is yours that does not need to be paid back with any sort of interest on top of it back to some lenders. For example, imagine professor Chernobai buying half a million dollar house. Typically

banks requires that you pay 20% of the house price out of your pocket. So, I would be paying $100,000, which is 20% of $500,000, out of my pocket, Savings I have in my bank accounts, right? The money that’s mine. This is Equity. And the remaining $400,000

would come from a home Loan from some local bank. This is Debt. Similarly, a company may have… may be worth $50,000,000, and out of that large number $10,000,000 would be Equity. So, this is the money essentially split between the owners. So

the owners …Umm… have $10,000,000 in their pockets, essentially. And the remaining $40,000,000 would be Debt. So that would come from some sort of Loans. And the question on Debt to Equity ratio includes things like how

should we decide on the proportions of Debt to Equity. Should it be 50 / 50? Should it be preferably no Debt at all? And if there is any Debt that the company’s planning for which type of financing should ituse? So probably

it would be determined by which type of financing is the least expensive. The second question is called working Capital management. And it has to do with so-called short-term things. Whether they are spent, or… whether it’s the money that the firm has to spend or that

it will be receiving. …Umm… Essentially you can imagine a standard Balance Sheet. And the two items that are important there are current Assets on its left-hand side, and current Liabilities on its right-hand side. So, it’s things

that are cash or that can be quickly converted into cash or things that would be… rather than received things that would be spent relatively soon. Such as current Liabilities. So it’s all those things that we call accounts payables, accounts receivables. Short-term

Loans, cash, inventory. All those things have to be managed on the daily basis, and they reflect day to day activities that the firm has to engage in. So the questions there are: should we buy our supplies on Credit or should we pay cash? What are the advantages of

each for our type of purchase? Should we sell our product to customers on Credit or should be require them to pay cash? How much cash should we have set aside just in case? On the one hand if we have enough cash to cover unforeseen expenses – that’s a good thing. On the

other hand too much cash may not be wise because it’s justsitting there, it’s not really working for you, it’s not generating any sort of return. And the last question is called Capital Budgeting. This has to do with planning money, expensesand

receipts, long-term. So planning long-term Investments, making long-term investment decisions. This has to do with how much should be invested into some new business. For example, if it’s a pizza restaurant then maybe it would like to expand and open a second location

somewhere. So, how much should we spend on maybe buying a building that is for sale? So that would be planning some immediate expense. But this also includes planning down the road, what would be coming in, what would be coming out of the firm. And so essentially we need to do a so-called

cost-benefit analysis over all future years that would determine for us whether this new project opportunity is worth it, worth investing money into, or not. And maybe we have several investment opportunities, not just one. So we need to beable to compare them. How do we compare them? And the last

item that’s relevant here is what we call risk, how uncertain our future Revenues are. Are they guaranteed to happen? Are they very unlikely? Are there different possible scenarios? So all of this is captured in what we call Capital

Budgeting.