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Important Points Discussed in Class

Corporate finance involves decisions about money, while accounting looks backward and financial statements look forward. Major corporate decisions include investing, which requires investments to meet their risk-adjusted hurdle rate and provide returns matching the cash flows' timing and size, financing, which requires optimizing the debt-equity mix to maximize firm value using debt that matches asset maturities, and dividends, which depend on current and future investment opportunities and investor preferences. For a business to sustain, investment returns must exceed the hurdle rate, with debt preferred when returns are higher than the rate and equity preferred when returns are lower.

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25 views1 page

Important Points Discussed in Class

Corporate finance involves decisions about money, while accounting looks backward and financial statements look forward. Major corporate decisions include investing, which requires investments to meet their risk-adjusted hurdle rate and provide returns matching the cash flows' timing and size, financing, which requires optimizing the debt-equity mix to maximize firm value using debt that matches asset maturities, and dividends, which depend on current and future investment opportunities and investor preferences. For a business to sustain, investment returns must exceed the hurdle rate, with debt preferred when returns are higher than the rate and equity preferred when returns are lower.

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febycv
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Important points Discussed in Class

1. Corporate Finance involves every decision involving money


2. Accounting is backward looking, while financial statement is forward looking
3. Major Corporate Decisions
Investing Decision
o Hurdle rate should reflect the riskiness of the investment & the mix of
debt and equity used to fund it
o Return should reflect magnitude & timings of the cash flow)
Financial Decision
o Optimal Mix of debt and equity maximizes the value of the firm
o Right kind of debt matches the asset tenor.
Dividend Decision
o Depends on current & potential investment opportunities
o Depends on investor preference like dividends or buybacks
4. For sustaining a business, the return should be higher than the hurdle rate.
5. Decision of Debt vs Equity
a. Debt is preferred when Return > Hurdle rate
b. Equity is preferred when Return < Hurdle rate
6. Shareholders need more return since the risk involved is more. Usually more
return is expected from a high growth company.
7. Companies take debt because it is treated as an expense and so it can be reduced
from taxable income.

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