Corporate Finance
MGMT640 – Textbook Notes
PART 1 FUNDAMENTALS OF CORPORATE FINANCE
Chapter 1 – The Financial Manager and The Firm
1.1 The Role of the Financial Manager * financial manager should make decisions that maximize value of owners stock/wealth – wealth is the economic value of the assets someone possesses * stakeholders – anyone other than an owner (stockholder) with a claim on the cash flows of a firm, including employees, suppliers, creditors, and the government * productive assets – the tangible (equipment, machinery, or manufacturing facility) and intangible assets (patents, trademarks, technical expertise, intellectual capital) a firm uses to generate cash flows * regardless of the type of asset, firm tries to select assets that will generate greatest cash flows * decision-making process through which firm purchases long term productive assets is called capital budgeting and is very important * financing decisions are concerned with ways in which firms obtain and manage long term financing to acquire and support their productive assets * 2 basic source of funds – debt and equity * equity represents ownership in the firm. Consists of capital contributions by the owners plus cash flows that have been reinvested in the firm * also, most firms borrow from a back or issue some type of long term debt to finance a productive asset * working capital management – the management of current assets, such as money owed by customers who purchase on credit, inventory, and current liabilities, such as money owed to suppliers * firm generates cash flows by selling goods and services it produces – firm is successful when these cash inflows exceed cash outflows needed to pay operating expenses, creditors, taxes * after meeting these obligations, the firm can pay the remaining cash, called residual cash flows, to the owners as cash dividend or it can reinvest the cash in the business * if
PART 1 FUNDAMENTALS OF CORPORATE FINANCE
Chapter 1 – The Financial Manager and The Firm
1.1 The Role of the Financial Manager * financial manager should make decisions that maximize value of owners stock/wealth – wealth is the economic value of the assets someone possesses * stakeholders – anyone other than an owner (stockholder) with a claim on the cash flows of a firm, including employees, suppliers, creditors, and the government * productive assets – the tangible (equipment, machinery, or manufacturing facility) and intangible assets (patents, trademarks, technical expertise, intellectual capital) a firm uses to generate cash flows * regardless of the type of asset, firm tries to select assets that will generate greatest cash flows * decision-making process through which firm purchases long term productive assets is called capital budgeting and is very important * financing decisions are concerned with ways in which firms obtain and manage long term financing to acquire and support their productive assets * 2 basic source of funds – debt and equity * equity represents ownership in the firm. Consists of capital contributions by the owners plus cash flows that have been reinvested in the firm * also, most firms borrow from a back or issue some type of long term debt to finance a productive asset * working capital management – the management of current assets, such as money owed by customers who purchase on credit, inventory, and current liabilities, such as money owed to suppliers * firm generates cash flows by selling goods and services it produces – firm is successful when these cash inflows exceed cash outflows needed to pay operating expenses, creditors, taxes * after meeting these obligations, the firm can pay the remaining cash, called residual cash flows, to the owners as cash dividend or it can reinvest the cash in the business * if