Introduction to Corporate Finance Corporate Finance addresses the following three questions: What long-term investments should the firm engage in? How can the firm raise money for the required investments? How much short-term cash flow does pany need to pay its bills? (RWJ ) The Balance-Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible Total Value of Assets: Shareholders’ Equity Current Liabilities Long-Term Debt Total Firm Value to Investors: The Balance-Sheet Model of the Firm Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt What long-term investments should the firm engage in? The Capital Budgeting Decision (Investment Decision) The Balance-Sheet Model of the Firm How can the firm raise the money for the required investments? The Capital Structure Decision (Financing Decision) Current Assets Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity Current Liabilities Long-Term Debt The Balance-Sheet Model of the Firm How much short-term cash flow does pany need to pay its bills? Working Capital Investment Decision (Financial Decision) Net Working Capital Shareholders’ Equity Current Liabilities Long-Term Debt Current Assets Fixed Assets 1 Tangible 2 Intangible 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. The Capital Structure decision can be viewed as how best to slice up a the pie. If how you slice the pie affects the size of the pie, then the capital structure decision matters. 50% Debt 50% Equity 25% Debt 75% Equity 70% Debt 30% Equity Cash flow from firm (C) The Firm and the Financial Markets Taxes (D) Firm Government Firm issues securities (A) Retained cash flows (F) Invests in assets (B) Dividends and debt payments (E) Current assets Fixed assets Financial markets Short-term debt Long-term debt Equity shares Ultimately, the fi
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