HOA SEN UNIVERSITY

FACULTY OF ECONOMICS AND

COMMERCE
 FACULTY OF ECONOMICS
AND COMMERCE

CORPORATE
FINANCE
 FACULTY OF ECONOMICS
AND COMMERCE

CORPORATE FINANCE
Undergraduate, Q1B 2021
Lectures 1
 Method of Grade Evaluation
Components Duration Assessment Forms Percentage Schedule
Mid-term 60 minutes Week 8
Test Closed-book exam 30%

Mini-Test 20 minutes Do the Mini-test in 20% Week 2-

class, class 14
participation, active
learner

Final Test 90 minutes Closed-book exam 50% Week 15

Total 100%
 OUTLINE OF LECTURE 1
• Explanation of course outline, evaluation
system, and textbooks
• Introduction to Corporate Finance
• Concepts for review based on Lecture 1
 LECTURE OUTLINE
Note that this class outline is an approximate guide only ; timetabling may change if certain
topics take more time, or less time, than expected.
Week Topics References Homework
1 Introduction to Corporate Finance Chapter 1&2 t.b.a
2 Time value of money Chapter 5 t.b.a
3 Time value of money (Cont.) Chapter 5 t.b.a
4 Bonds and their valuation Chapter 6 t.b.a
5 Stocks and their valuation Chapter 7 t.b.a
6 Project investment criteria and budgeting capital Chapter 8 t.b.a
decision
7 Part A: Project investment criteria and budgeting Chapter 8&9 t.b.a
capital decision (Cont.)
Part B: Cash flow projection
8 Mid-term test+ continue teaching
9 Cash flow projection (Cont.) Chapter 9 t.b.a
10 Introduction to risk and return Chapter 11 t.b.a
11 Risk and return: Capital Asset Pricing Model Chapter 12 t.b.a
(CAPM)
12 Capital structure and cost of capital Chapter 13 t.b.a
13 Part A: Capital structure and cost of capital (Cont.) Chapter t.b.a
Part B: Corporate financing 13&14
14 Corporate financing (Cont.) Chapter 14 t.b.a
15 Review
 References
• Fundamentals of Corporate Finance, Brealey et al.,
McGraw Hill, 9th edition, USA, 2018.
• Foundation of Financial Management, Block & Hirt,
McGraw Hill, 12th edition, USA, 2008.
• Fundamentals of corporate Finance, Ross et al.,
Mc Graw Hill, 10th edition, USA, 2013
• Other relevant materials.
 Lecture 1: Introduction to Corporate Finance
Main Contents:
Chapter 1: Goals and Governance of the Corporation
1. What is corporate finance
2. Introduction to Corporation
3. Goals of a Financial Management
4. Who is Financial Manager
Chapter 2: Financial Markets and Institution
1. Importance of Financial Markets and Institutions
2. Flow of savings to Corporations
3. Functions of Financial Markets and Intermediaries
4. Cost of Capital.
 I. What is Corporate Finance

Big picture

Financing
Investment
decision
Asset: $10,000 Debt: $4,000 decision

Equity: $6,000
$10,000 $10,000

Which decision is more important?

 I. What is Corporate Finance
Corporate finance is the study of ways to
answer the three questions.
– Investment Decision
– Financing Decision
– Dividend Decision
 I. What is Corporate Finance
Investment Decision
•The investment decision: capital budgeting
decision starts with identifying investment
opportunities (what company spend its
money on)
• The financial manager’s first task is to
identify promising projects and decide how
much to invest in each project.
 I. What is Corporate Finance
Financing Decision
•The financial manager’s second major task is to
raise capital for the firm to meet its investments
and operations.

• Firms can finance through equity or debt.

The mix of long-term debt and equity financing
is called capital structure.
 I. What is Corporate Finance
Capital Structure
•The value of the firm can be thought of as a pie.
•The goal of the manager is to increase the size of
the pie.
30%
S 70%
•The Capital Structure decision D E
can be viewed as how best to
slice the pie.

•If how you slice the pie affects the size of the pie,
then the capital structure decision matters.
 I. What is Corporate Finance

Capital Structure
•Specific mix of debt (D) and equity (E) used
to finance the firm’s operations

• Decisions need to be made on both the

financing mix, and how and where to raise
money
 I. What is Corporate Finance
Dividend Decision
The financial manager’s third major task is to
decide on a sensible dividend policy
•How much of the profit should be
1. Retained?
2. paid as dividend?
•Is the dividend sustainable?
•Which option is best to maximize shareholders’
wealth?
 I. What is Corporate Finance
Investment Decision
 I. What is Corporate Finance
Investment Decision
 I. What is Corporate Finance
Capital Structure
 I. What is Corporate Finance
Example:
Your company has net income of $1,600 for the
year. You paid out $400 in dividends to your
stockholders
How much of the profit is retained?
 I. What is Corporate Finance
Buy more facilities? What kind?
Investment decision Open new market?
Invest in new technique?

Funds …
Financial Manager
… from bank loan?
… from papa or mama?
…from venture capitalists?
Financing decision
…from stock market?

HOW MUCH?

Role of investment decision and Financing decision:

Ensuring an invested project brings more worth than it costs20
 I. What is Corporate Finance

What will financial manager do next after making financial decision ?

… raising funds for investment and operation

…from Long-Term financing

•Investors (investing in debt or equity)
•Bank loans

1 year

…from Short-Term financing

•How to invest spare cash for brief period (short term investment decision)
•How to raise cash for short term (short term financing decision)
 I. What is Corporate Finance
Personal Finance Vs Corporate Finance

Personal Finance Corporate Finance

How person manage their How a company manage
money. money
Answer questions: Answer questions:
How much they spend? How firms raise money from
How much they save? investors?
How much they invest their How firm invest money to
savings? earn profit?
Whether to reinvest profit in
the business or distribute
them back to investors?
 I. What is Corporate Finance
Finance Vs Accounting

Treasurer Vs controller
Cash flows Vs Accrual method

Income statement summary

Accrual Cash
Sales $100,000 $0
Costs ($80,000) ($80,000)
Net profit $ 20,000 ($80,000)
 I. What is Corporate Finance

Quiz

Determine which ones are investment decisions and which ones are financing
decisions
1. Barclays acquired the core business of Lehman Brothers for $1 35 billion
2. Telstra issues 10,000 new shares for $2
3. Rio Tinto borrows $450 million to develop the new iron ore mine.
 I. What is Corporate Finance?
Example: Determine which ones are investment decisions and which ones are financing
decisions?
Purchased the Union Power generating
Entergy’s Arkansas subsidiary issued
Entergy station near El Dorado, Arkansas, for $948
$325 million of bonds maturing in 2026
million

Cut total capital investment for 2016 to $34

Eliminated share repurchases for 2016,
ExxonMobil billion, down 12% because of plummeting
thus reducing payout to stockholders.
oil prices.

Spent $60 million to acquire Pebbles, an

Financed capital investment and acquisitions
Facebook Israeli company developing virtual
with operating cash flow.
reality software

Ford’s credit subsidiary issued $3.5 billion in Announced plan to invest $1 billion to
Ford
long-term debt build an assembly plant in Mexico.

Total capital investment fell to $655

Maintained credit lines with banks that million, after completing investments
John Deere
allowed it to borrow up to $7.2 billion. for producing clean-burning diesel
engines.
II. Introduction to Corporation
Forms of Business Organization

CORPORATION

…an organized business

…a separate legal entity
…owned by stockholders

MINICASE:
When Enron and Worldcom failed in 2002, two of the
largest bankcrupcies ever, Peter was the shareholder
of Enron. He would:

1. Reserve all his investment worth on Enron.

2. Loose all his investment worth on Enron.
3. Loose all his invesment worth on Enron as well as
his other private properties.
4. All of these are possible to occur.
II. Introduction to Corporation

SOLE PROPRIETORSHIP

…a business
…not separate legal entity
… owned and run by one dividual

MINICASE:
When ABC company failed in [Link] was the owner
of this company. He would:

1. Reserve all his investment worth on ABC.

2. Loose all his investment worth on ABC.
3. Loose all his investment worth on ABC as well as
his other private properties.
4. All of these are possible to occur.
II. Introduction to Corporation

PARTNERSHIP

…an arrangements between individuals

…not a separate legal entity
…owned by individuals

MINICASE:
When FM failed in 2002. Peter was the owner
of FM. He would:

1. Reserve all his investment worth on FM.

2. Loose all his investment worth on FM
3. Loose all his investment worth on FM as well as
his other private properties.
4. All of these are possible to occur.
II. Introduction to Corporation
(cont’d)

Forms of Business Organization

Unlimited liability

Limited liability
Partnership

Sole Proprietorship

Business income tax

Corporation
Personal income tax
 II. Introduction to Corporation (cont’d)
Forms of Business Organization
Sole proprietorship Partnership Corporation
Advantage *Owner receives all the *Easy to establish *Limited liability
profits (with the exception of * Transfer of
*Profits are taxed only developing a ownership,
once partnership agreement) shareholders can
*Owner makes all *Profits taxed only sell their shares
decisions and is in once *Capital is easier
complete control of the *Partners may have to raise through the
company (could also be complementary skills sale of stock
a disadvantage) *Company paid
*Easiest and least fringe benefits
expensive form of Tax benefits
ownership to organize
 II. Introduction to Corporation (cont’d)
Forms of Business Organization
Sole proprietorship Partnership Corporation
Disadvantage *Unlimited liability *Partners are jointly *Double taxation
if anything happens and individually liable (corporation and shareholder
in the business. for the actions of the earnings taxed)
Your personal assets other partners *Can be costly to form
are at risk (including *Profits must be *More administrative duties
your home) shared with the - required by law to have
*Limited in raising partners annual meetings, notify
funds and may have *Divided decision stockholders of the meeting,
to acquire consumer making Business can must keep minutes of
loans suffer if the detailed meetings and turn in
*No separate legal partnership agreement *Pay corporate taxes at a
status is not in place different time than other
forms of business
II. Introduction to Corporation
(cont’d)
III. Who is Financial Manager?
 III. Who is Financial Manager?
• Financial manager are responsible for organizing and
supervising the capital budgeting process
• CFOs oversee the treasurer and controller and sets the
overall financial strategy
• Treasurer is responsible for financing cash management
and relationships with banks and other financial
institutions.
• Controllers have responsibilities for preparation of
financial statement, budgeting, accounting and taxes
III. Who is Financial Manager?
III. Who is Financial Manager?

Home Depot’s income statement, fiscal 2014

III. Who is Financial Manager?

Home Depot’s statement of cash flows (figures in $ millions)

 III. Who is Financial Manager?
Role of financial manager
Flow of cash between investors and the firm’s operation

1 Cash raised by selling financial assets to investor

2 Cash invested in the firm’s operations

3 Cash generated in the firm’s operations

4a Cash reinvested

4b Cash returned to investor

 III. Who is Financial Manager?
• Role of the financial manager is to answer these three
questions.

1. What assets should we buy (real and financial)?

2. How do we fund the acquisition of the assets?
3. What dividends should be paid to the shareholders?
 III. Who is Financial Manager?
EXAMPLE:
Fritz and Frieda went to business school together
10 years ago. They have just been hired by a
midsize corporation that wants to bring in new
financial managers. Fritz studied finance, with an
emphasis on financial markets and institutions.
Frieda majored in accounting
Who is more suited to be treasurer and who
controller? Briefly explain.
IV. Goals of Financial Management
Finance is the art and science of money
management
Financial management is about maintenance
and creation of economic value or wealth

Example:
Market value of company A = $70 billion
Investors of company A invested = $30 billion
Wealth creation for investors = $40 billion
IV. Goals of Financial Management
Maximizing market value of shareholders’ investment in the firm

Ethics and management objectives

IV. Goals of Financial Management
• Survival
• Maximising profits
• Minimising costs
• Maximize the wealth of the owners.

An effective financial manager is one who

makes decisions on the best interest of
stockholders
IV. Goals of Financial Management
Profit Maximisation Wealth Maximisation

It refers to how much dollar profit Focus on maximizing the value of

the company makes a company, i.e value of stock
It is short-term approach, mostly It is long-term approach,
concerned about short-term benefit concerned about value of financial
asset (stock, bond)

Ignores the timing of return, Consider the timing of return,

magnitude of return and risk magnitude of return and risk

Fulfilling objective of earning Maximize shareholder wealth =

profit may not help in creating maximize share price = maximize
wealth in the long run firm’ value
Not consider social responsibility
 IV. Goals of Financial Management
What is more important between
Profit Maximisation and Wealth Maximisation?

Value R&D

Quality Profit

Culture Market
Creating value will help create profit. share
But create profit does not necessarily
create value for a company
IV. Goals of Financial Management
How to maximize Profit?
* Increase current profits by cutting back on
Maintenance this may damage future profit.
* Increase profits by cutting this year’s dividend and
investing the freed-up cash in the firm.
Profits can be calculated in different ways using
different sets of accounting rules.
 V. Agency Problems, Executive Compensation, and Corporate Governance

Menace for
Corporation
Agency Problem!!!

Manager

own interests Maximizing value of shareholder

 V. Agency Problems, Executive Compensation, and Corporate Governance

Agency Problems
* Agency relationship
– Stockholders (principals) hire managers (agents) to
run the company. There will be conflict because they
are two different groups
* Agency problem
– There is possibility of conflict of interests between
principals and agents
* Agency cost: arises from agency problem that are
borne by shareholders, represent a loss of shareholders
wealth
 V. Agency Problems, Executive Compensation, and
Corporate Governance

What shareholders want What manager want

High dividend High pay and benefits
High share price Good reputation
High profit Job security
Good working
environment
Flexible working hour
 V. Agency Problems, Executive Compensation, and
Corporate Governance

* Solve agency problem

How do we align the interest of stakeholders and managers?
Managerial compensation plans
– Incentives plan: the management compensation to share
prices, e.g the granting of stock option
– Performance plan: the management compensation to EPS or
growth in EPS, reward the manager with shares and/or cash
bonuses
V. Agency Problems, Executive Compensation, and Corporate
Governance
Market forces
Shareholder activism: through executing voting power,
shareholders participate in activities that can change the
corporation
Institutional investors: have more power to place pressure on
the management to take action and to maximize shareholder
wealth
Threat of takeover
The further the stock price falls, the easier it is for another
company to buy up the majority of shares and take over. The
old management team is then likely to find itself out on the
street
 V. Agency Problems, Executive Compensation, and Corporate Governance

Example
Compensation plans also help managers maximize value.
BMM cite Walt Disney Corporation as an example where
the CEO’s package had three components – a base salary of
$750,000, an annual bonus of 2- percent of Disney’s net
income above a threshold of normal profitability and a 10-
year option that allowed him to purchase 2 million shares
for $14 per share.
V. Importance of Financial Markets
and Institutions

All Corporations face…

…investment decisions
…financing decisions

FINANCIAL SYSTEM

Financial instrument (what)

Financial Markets (where)

Financial Institutions (who)

 V. Importance of Financial Markets and Institutions
(cont’d)

 Financial instruments

Financial claim and financial assets (bond, stocks)

 Financial Markets

is the place where financial instruments are traded

Financial institution

An organization that raise money from investors and provides

financing for individuals, companies and other organization
V. Importance of Financial Markets and Institutions (cont’d)
Market Where What Who
Primary where new securities are issued new securities Issuers;
market and sold investors
Secondary where previously issued Previous issued securities investors
securities are traded
Money Money-market instrument Short-term financial Savers and
market (short-term) financial instrument (as users
instrument are traded commercial paper,
treasure bills, negotiable
certificate of deposit)
Capital Long-term financial instrument Long-term financial Savers and
market are traded instrument (stock, users
corporate bonds and
government bonds)
Debt (fix- where debt securities are issued Debt securities Creditor;
income) and traded debtor
market
Equity where provides equity security equity security investors
market
 V. Importance of Financial Markets and Institutions (cont’d)
 Financial intermediaries

Intermediation
The process of generating funds (capital resource) from savers to users

an organization
financing
raise

Savers Users

Financial intermediaries:
An organization that raises money from investors and provides financing for individual
corporation or other organizations.
V. Importance of Financial Markets and Institutions (cont’d)
 Financial intermediaries (cont’d)

Classification of financial intermediaries

Mutual fund An investment company Pooling the savings of investors

Invest in a portfolio of securities

Hedge fund A whole sale (*) investment business

Follow high-risk investment

Pension fund Extracting from employee’s monthly paycheck

Investing in mutual funds

Finally withdrawn as retirement

 V. Importance of Financial Markets and Institutions
(cont’d)

 Financial intermediaries (cont’d)

Mutual fund
 V. Importance of Financial Markets and Institutions (cont’d)
 Financial intermediaries (cont’d)
CRITERIAL HEDGE FUND MUTUAL FUND

Meaning Private investment fund that that pools An investment company that pools the
the savings of many investors and savings of many investors and invests in a
invests in a portfolio of securities but portfolio of securities.
pursues complex, high-risk investment
strategies
Return Absolute Relative
Management Aggressively managed. They follow Comparatively less aggressively managed.
complex, high-risk investment strategies

Investor type Pension fund, endowment fund, wealthy Retail investors

individuals.
Regulation Less regulation Strict regulation

Fees for Performance based. Based on the percentage of assets managed.

management
Ownership of Substantial Not-substantial
fund manager
Transparency Information provided to investors Annual reports are published and semi-
only. annual disclosure of the performance of
 V. Importance of Financial Markets and Institutions (cont’d)

 Financial Institutions

Commercial Bank

…advice and assist companies in raising funds

…advice on takeovers, A&M

…underwrite stock offering
Investment Bank
…invest in the start-ups

…advice investment or manage porfolio on FX derivatives

 V. Importance of Financial Markets and Institutions (cont’d)

 Financial Institutions (cont’d)

Insurance company

…specializing in only providing long-term financing

…investing in corporate stocks and bonds

V. Importance of Financial Markets and Institutions (cont’d)

Financial institution vs financial intermediaries

Financial Institutions Financial intermediaries

Accept deposits or sell insurance Pool investor savings and

policies, provide financial invest in portfolios of traded
service. They not only invest in securities
securities but also lend directly
to businesses

Commercial banks, insurance Mutual fund, Hedge fund and

banks pension fund
V. Importance of Financial Markets and Institutions
(cont’d)
VI. Functions of Financial Markets and Intermediaries
(cont’d)
VII. Flow of Savings to Corporation (cont’d)

Flow of savings to investment in a closely held corporation

VII. Flow of Savings to Corporation (cont’d)

Flow of savings to investment in a large, public corporation

 VII. Flow of Savings to Corporation (cont’d)
 Comments:

• Applied for a newly established corporations.

• Applied for a large, profitable, public firms

• Cash retained and reinvested is cash saved and invested on behalf of the
firm’s shareholders
 VIII. Cost of Capital

Cost of Capital

Financial Manager

• The cost of taking funds from financial markets

• Minimum acceptable rate of return on capital investment

 VIII. Cost of Capital (cont’d)

Rate (%)

• Cost of capital 15% • Investment project’s rate of return

• Investment project’s rate of return 12% • Cost of capital

REFUSE the project 0% ACCEPT the project

 VIII. Cost of Capital (cont’d)

Cost of Capital for corporate reinvestment is set by the rate of return

on investment opportunity in financial markets
 List of term
Financial asset Mutual fund
Capital structure Hedge fund
Sole proprietorship Pension Fund
Partnership Primary market
Corporation Secondary market
Agency problem Shareholder
Cost of capital creditor
Debt debtor
Equity Separate legal entity (thực thể pháp lý tách biệt)
Financial intermediary Limited liabilities
Financial institution Unlimited liabilities
Thank you for your attention !