Finance 301

1
Finance 301

• Lecturer András Marosi
• BUS 2-32 C
• fin301_at_ualberta.ca
• Subject line Andras or Marosi

2
Course Web Pages

• All on Blackboard

3
Seminar Instructors

• Carmen Stefanescu
• Monday 200pm
• Wednesday 200pm
• fin301_at_ualberta.ca
• Subject line Carmen or Stefanescu
• Volkan Kayacetin
• Wednesday 400pm
• Friday 200pm
• fin301_at_ualberta.ca
• Subject line Volkan or Kayacetin

4
Fundamentals of Corporate Finance

• 5th Canadian Edition
• Ross, Westerfield, Jaffe, and Roberts

5
Grading
6
Grades Continued
7
(No Transcript)
8
The Rest of the Syllabus

• Grading
• No other grades are available
• Re-grade policy
• Missed exam/homeworks
• Missed final
• Email policies
• fin301_at_ualberta.ca
• Subject line as address
• Use discussion board, follow email etiquette
• Use your university account!!!

9
The Rest of the Syllabus

• Homeworks
• Submitted via web
• Cutoff time is 400PM on the due date.
• There is no such thing as a late hand-in.
  Homeworks not handed in by the cutoff time are
  not accepted.
• Missed homeworks

10
The Rest of the Syllabus

• Exams
• Bring photo ID
• You are responsible for your own
  calculator/writing implements
• Formula sheets
• Midterm One (1) 8½ 11 inch formula sheet
• Final Two (2) 8½ 11 inch formula sheets
• Must be in human handwriting and may not be
  mechanically altered (e.g. reduced by a
  photocopier)
• Can have anything you want on them Formulas,
  cup cake recipes, shoe sizes

11
The Rest of the Syllabus

• Your calculator is a tool
• End of chapter problems
• Missed classes
• Honesty and respect

12
The Rest of the Syllabus

• Getting to know you
• Request that your provide me with a picture of
  yourself with your name.
• Can be as simple as a photocopy of some piece of
  picture ID
• This is a REQUEST
• This is NOT MANDATORY
• The sole purpose is to help me learn your names.
• All pictures will be destroyed at the end of
  classes in April
• Class photo (next week)
• Subject to student approval via web-based survey
• Again, this is NOT MANDATORY

13
What is Corporate Finance?

• Financial decision making process of corporations
• Why focus on decisions made by corporations?
• Other organizational forms
• Sole proprietorship
• Partnership
• How do these differ?

14
Partnerships

• Owned by few people
• Owners keep all profits
• But unlimited liability (lose shirt)
• Limited life
• Insufficient capital (forgone opportunities)
• Difficult to transfer ownership
• Who is a limited partner?

15
Corporations

• Separate legal entity from its owners
• Owners are shareholders
• Separation of ownership and management
• Limited liability
• Ownership easily transferred
• Capital formation made easy
• Unlimited life
• Disadvantage - double taxation

16
How the funds flow
CAH Interest Dividend
Goods Services
Corporation
CAH
CAH Stocks Bonds
CAH Interest Dividend
CAH (TAXES)
Government
Financial Institutions
Stocks Bonds
Investors /Households
CAH Savings withdrawals
CAH (TAXES)
17
Investment and Financing Decisions

• What to buy - Capital Budgeting
• Assets
• Real (tangible, intangible)
• Financial
• How to pay for it - Capital Structure
• Mix of debt and equity
• Buy low, sell high
• Theory of value

18
Goals

• Survive?
• Beat competition?
• Maximize sales/profits?
• Steady growth?
• Maximize stock price?

19
Goals of a Financial Manager

• Shareholders benefit if managers maximize current
  value of existing stock (share price)
• Management should select investments and capital
  structure that maximize stock value (easier
  said...)
• Is market value of stock a good measure?
• Issues of Market Efficiency

20
Agency Problems

• Managers are agents of shareholders
• Conflict of interest between managers and the
  shareholders Agency Problems
• Managerial compensation/incentives
• Corporate control
• Hiring and firing decisions
• Takeovers

21
Dilbert on Shareholder Value
22
Time Matters

• 10,000 right now vs. 10,000 next year.
• Which do you prefer?
• 10,000 right now vs. 11,000 next year
• Which do you prefer?
• The relationship between timing of cash flows and
  value
• The time value of money

23
Risk Matters

• Get 10,000 right now, or
• Coin toss 15,000 heads - 5,000 tails
• Which do you prefer?
• Quantifying risk
• Wanted an easily calculated measure to help
  value projects

24
Market Value vs. Book Value

• Firms accounting value on particular date.

Assets
Liabilities
Net Working Capital
Current assets
Current Liabilities
Long-term debt
Fixed assets
Equity
Common Stock
25
Accounting and Finance

• Market values not book values
• Stale prices mean bad decisions
• Imagine driving your car and only looking in the
  rear-view mirror
• We like cash
• Non-cash items like depreciation lower net income
• Sales booked increase income but customer may not
  have paid yet

26
Cash Flow
27
Return Explained
Yield
Capital Gain or Loss