Introduction to Corporate Finance: A Comprehensive Guide

Chapter 1: Introduction to Finance

Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers. Here are some key concepts:

• Real assets: Tangible assets.
• Financial assets: Claims on real assets.
• Flow of savings: Savings flow from households to governments and businesses.
• Financial intermediaries (indirect claims): Invest on behalf of investors (e.g., chartered banks, pension funds, mutual funds).
• Market intermediaries (direct claims): Brokers (e.g., insurance).
• Credit crunch: Financial intermediaries raise loan costs due to an inability to secure financing on reasonable terms.

Crown corporations, like Hydro Quebec, are also major borrowers.

Types of Financial Assets

• Non-marketable financial assets: Invested funds available on demand in non-tradable instruments.
• Marketable financial assets: Assets tradable among market participants.
• Money market securities: Short-term debt instruments.
• Capital market securities: Debt securities with maturities greater than one year and equity securities.

Financial Markets

• Market capitalization: The total market value of an entity's common equity.
• Third market: Trading of securities listed on organized exchanges in the over-the-counter (OTC) market.
• Fourth market: Direct trading of securities between investors without brokers or dealers.
• Auction markets, OTC markets, brokers of securities.

Chapter 2: Business Structures and Corporate Governance

Types of Business Structures

• Sole proprietorship: Easy setup but unlimited liability.
• Partnership: Limited liability (liability of initial investment).
• Trust: A legal organization where one party owns assets, and a different party manages or controls them. Examples include income trusts and royalty trusts (set up to invest in a company's shares and debt obligations). Debt can be used in a trust to lower taxes paid on investment income.
• Corporation: A business organized as a separate legal entity under corporate law, with ownership divided into transferable shares. Articles of incorporation outline the firm's basic information. Corporations are immortal, but ownership changes can be a concern for larger companies. Firm managers enhance owners' wealth, not just profits, and have social responsibility.

Corporate Governance

• Agency relationship: The relationship between shareholders (company owners) and managers (hired to work on their behalf).
• Agency problems: Potential conflicts of interest among managers, shareholders, and creditors.
• Agency costs: Costs associated with agency problems.
• Moral hazard: Immoral behavior due to not bearing the full consequences, such as Lehman Brothers making poor investments, knowing the government would bail them out.
• Corporate governance: Rules set by stakeholders to overcome inherent conflicts of interest in corporations. Setting a good board of directors is key.

Financial Management

• Capital budgeting or capital expenditure analysis: The framework for analyzing investment or asset decisions.
• Financial management: Managing a firm's investment and debt decisions.
• Corporate finance: Sources of money for a company (borrowing or raising equity).
• Treasurer: Focuses on finance: forecasting, pension management, capital budgeting, cash management, credit management, financing, risk management.
• Controller: Focuses on accounting: compliance, tax management, systems/MIS, internal audit, accounting, and budgeting.
• CFO > Controller/Treasurer
• Analyst (First level), Associate (Second level), Manager (Third level), Private Bankers (Large Wealth), Retail Brokers (Medium Wealth).

Chapter 5: Time Value of Money

• Compound interest on a loan (divide n if compounded differently): FV = PV(1 + r/m)^(mt)
• Perpetuity 2: PV = PMT + PMT/k
• Simple interest: A = P(1 + rt) or A = p + (n x p x k)
• Basis point: 1/100 of 1 percent