corporate finance notes

Pagina 1

CHAPTER 1 INTRODUCION TO CORPORATE FINANCE CORPORATE INVESTMENT AND FINANCING DECISIONS The distinction between REAL assets (assets used to produce goods and services) and FINANCIAL assets (claims to the income generated by the firm’s real assets) is necessary to identify the main corporate decisions: INVESTMENT DECISIONS, also called capital budgeting, capital expenditure or capex decisions, involve the purchase of real assets. Particularly the decision concerns the investment in tangible or intangible assets. FINANCING DECISIONS involve the selling of the firm’s financial assets; shareholders, that are equity investors, contribute to equity financing. Financing can happen through debt or equity; this involves the CAPITAL STRUCTURE decision. (Capital refers to the firm’s sources of long-term financing). WHAT IS A CORPORATION? A corporation is a legal entity characterized by • Separation of ownership and control • Legal personality • Limited liability • Indefinite duration • Freely transferable shares Different types of corporations exist: public or private corporations, listed or not, limited liability corporations (LLC). Other forms of business organizations are sole proprietorships, partnerships, limited liability options ( limited liability refers to the fact that owners of the corporation are not personally liable with the corporation’s obligations). FLOW OF CASH BETWEEN FINANCIAL MARKETS AND FIRM’S OPERATIONS The flow of cash starts with an amount of cash provided by inve stors that invest in the financial markets, and so buy financial assets (bonds or shares) from issuing companies. The financial manager’s role is the one on an intermediary: he invests the cash raised in the financial market to finance the firm’s operation, making the firm grow and (hopefully)…