Fundamentals of Corporate Finance
Chapter 1: Introduction to Corporate Finance (Summary)
This chapter has introduced you to some of the basic ideas in corporate finance. In it, we saw that:
1. corporate finance has three main areas of concerns:
a. What long-term investments should the firm take? This is the capital budgeting decision
b. deductibleWhere will the firm get the long-term financing to pay for its investment? In other words, what mixture of debt and equity should we use to fund our operations? This is the capital structure decision
c. How should the firm manage its everyday financial activities? This is the working capital decision
2. The goal of financial management in a for-profit business is to make decisions that increas
e the value of the stock or, more generally, increase the market value of the equity
3. The corporate form of organization is superior to other forms when it comes to raising money and transferring ownership interest, but it has the disadvantage of double taxation
4. There is the possibility of conflicts between shareholders and management in a large corporation. We called these conflicts agency problems and discussed how they might be controlled and reduced
5. The advantages of the corporate form are enhanced by the existence of financial markets. Financial institutions function to promote the efficiency of financial markets. Financial markets function as primary and secondary markets for corporate securities and can be organized as either dealer or auction markets. Globalization, deregulation, and financial engineering are important forces shaping financial markets and the practice of financial management
Of the topics we have discussed thus far, the most important is the goal of financial manag
ement: maximizing the value of the stock. Throughout the text, as we analyze financial decisions, we always ask the same question: how does the decision under consideration affect the value of the shares?
Chapter 2 Financial Statements, Taxes, and Cash Flow (Summary)
This chapter has introduced you to some of the basics of financial statements, taxes, and cash flow. In it we saw that:
1. The book values on an accounting balance sheet can be very different from market values. The goal of financial management is to maximize the market value of the stock, not its book value
2. Net income as it is computed on the income statement is not cash flow. A primary reason is that depreciation, a non-cash expense, is deducted when net income is computed
3. Marginal and average tax rates can be different; the marginal tax rate is relevant for mos
t financial decisions
4. There is a cash flow identity much like the balance sheet identity. It says that cash flow from assets equal cash flow to bondholders and shareholders. The calculation of cash flow from financial statements isn’t difficult. Care must be taken in handling non-cash expenses, such as depreciation, and in not confusing operating costs with financial costs. Most of all, it is important not to confuse book values with market values and accounting income with cash flow.
5. different types of Canadian investment income, dividends, interest, and capital gains are taxed differently
6. Corporate income taxes create a tax advantage for debt financing (paying tax-deductible interest) over equity financing (paying dividends).
7. Capital cost allowance (CCA) is depreciation for tax purposes in Canada. CCA calculations are important for determining cash flows.
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