Corporate Finance

JANUARY 10, 2017

INTRODUCTION
Spring 2017 FNCE 611/614
Prof. Stephan Dieckmann

NAME OF INITIATIVE OR GROUP

U.S. Stocks Hit Record Close

Performance over the last year

U.S. Stocks Hit Record Close

Performance compared to DAX

Macys Inc.
Performance over the last 3 months

Shake Shack Inc.

Performance over the last year

What are the goals of a shareholder?

Shareholders (the owners of a corporation) typically want several things:

1. To be as rich as possible, that is, to maximize his or her current wealth.
2. To transform that wealth into the most desirable time pattern of
consumption either by borrowing to spend now or investing to spend later.
3. To manage the risk characteristics of that consumption plan.
And what can (or should) financial managers do to help the shareholders
achieve their goals?

Corporate Finance
Some Terminology

Real assets, assets used to produce goods and services.

Financial assets, financial claims to the income generated by the

firms real assets.

Investment decision, purchase of real assets.

Financing decision, sale of financial assets.

Corporate Finance
Flow of Cash

(2)

Firm's

Financial

operations

manager

(3)

(1)

(4a)

Financial
markets

(4b)

What are the goals of this course?

FNCE 614 / first half of FNCE 611
1. We study how to calculate the present value of cash flows, allowing us
to determine the value of bonds and stocks, and to understand the basic
rules for investment decisions.
2. A financial manager wants to know about a good measure of risk for
their firm, and we formally introduce portfolio theory and the capital asset
pricing model.
second half of FNCE 611
3. An overview of financing instruments; we study how corporations issue
securities, and discuss what information market participants seem to care
about.
4. We cover debt and payout policies and what ingredients to consider in
the firms capital structure decision. Last but not least, there will be an
introduction to option markets.
9

Foundations of Present Values

Preview
We said that shareholders would like to transform their wealth into the
most desirable time pattern of consumption. But how can they do that?

10

Foundations of Present Values

Preview
We said that shareholders would like to transform their wealth into the
most desirable time pattern of consumption. Suppose you have $100 today.
Consumption
Tomorrow

Slope?

$110

$1.1
$1

$100
11

Consumption
Today

Bond Markets
U.S. Treasury yields over the last 3 months

12

Sudden Surge
U.S. 30-year fixed mortgages rates

13

Agency Problems
Roots
Shareholders cannot fully control what managers do.
Agency problems occur when managers do not act in shareholders
interest, but in their own interest.

Agency costs incur when

1. managers do not attempt to maximize firm value, and
2. shareholders incur costs to monitor the managers and constrain
their actions.

Some claim that the economic crisis of 2007 2009, which started in
the mortgage industry, was largely an agency problem.

14

Agency Problems
Mitigation
Good systems of corporate governance try to mitigate such agency
problems. Some of the characteristics include

Legal and Regulatory Requirements

Compensation Plans
Board of Directors
Monitoring
Takeovers
Shareholder Pressure

15

Introduction
Review and Preparation
To review this class, please study BMA Chapters 1.1 and 1.2.
To prepare for the next class, a quiz is due at midnight Jan 11.

16