Today: Review the Syllabus Start chapter 1

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TodayReview the SyllabusStart chapter 1
Principles of Corporate Finance
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For This Course You Need to Have

• 1. The textbook Lasher. Buy a used book. Order
  on-line if cheap. I have pdf files of the first
  few chapters if you dont have your book yet.

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For This Course You Need to Have

• 2. A financial calculator
• HP 10-BII is less than 40. You have time to
  order it cheaper on-line.
• The calculator needs to do IRR (the most basic TI
  does not)
• The BA II plus (Texas instruments) is harder to
  use
• Others do more than we need but are OK

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Expectations

We are what we pretend to be, so we must be
careful what we pretend to be. Kurt Vonnegut,
Mother NightUS novelist (1922 - 2007)

• Buy a book and calculator
• Come to class and participate
• Do assignments
• Keep up/be prepared
• Be engaged in class and ask questions
• Pretend that you LOVE Finance

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Assignments

• Go to the course web page
• http//www.agecon.purdue.edu/academic/agec424/inde
  x2.html
• At this site you can download
• Lecture PowerPoint slides (print 3 to 6 slides
  per page) most often posted before class,
  sometimes after.
• Assignments/schedule
• Spreadsheet templates

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Assignments Continued

• Read chapters one and two of the text
• More will be assigned later in the week
• Bring you book to lab this week
• Demonstrate finding the course site
• http//www.agecon.purdue.edu/academic/agec424/inde
  x2.html

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What is going on in my life?

• Teaching AGEC 424 and supervising graduate
  students
• Teach 2nd - 3rd grade Sunday School class at
  Saint Andrew United Methodist Church
• Dealing with my wood hobby/business
• Parenting two girls (9th and 11th grades)

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CHAPTER 1Foundations
TGB Lecture 1
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This first week in AGEC 424

• Read Chapter 1. Part of the chapter covered
  here.
• Read Chapter 2. Accounting review is covered
  with via a set of test-type questions in lab this
  week.
• We will start Chapter 3 as soon as Fri.
• Commentary on reading the chapters

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Main Areas of Finance

• Investments and financial markets
• Financial management of corporations
• Fields are separate but related

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Chapter AFN. Additional funds needed and part of
Ch. 13
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Outline link
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Assets

• Real assetan object that provides a service,
  such as a house, car, art, coin
• Financial asseta document representing a claim
  to income
• Stockownership interest in a company
• Entitled to a share of the firms profits, either
  dividends or future growth
• Bonddebt interest in a company
• Entitled to interest and repayment of principal
• Investing involves buying financial assets in the
  hope of earning a return
• Can be made directly or indirectly (buying shares
  in a mutual fund)

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Financial Markets

• Financial Market
• Financial assets are issued by corporations and
  bought by investors in financial markets
• A framework or organization in which people can
  buy/sell securities
• Stock market (NYSE, AMEX, OTC)--entire network of
  brokers and exchanges all connected together
• Stockbroker (broker)--person who is licensed to
  trade securities for a commission

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Financial Markets

• Secondary marketplace where investors trade
  securities among themselves (NYSE, etc.)
• Most transactions are of this type
• Primary marketmarket where securities are
  initially sold (I.P.O.)
• Investments
• Making decisions about buying and selling stock
  and bonds
• Financial management
• Decisions about raising money and how to spend it

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Raising Money

• Financing means raising money to acquire
  something
• Forms of Financing
• Issuing stock (equity financing)
• Borrowing money (debt financing)
• Bank
• Issuing bonds
• Leasing
• Internal financing (retaining earnings)
• Still considered equity financing

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The Price of SecuritiesA Link Between the Firm
and the Market

• Investors buy securities for the future cash
  flows expected from them
• Price investors are willing to pay depends on
  expectations of how well the companies are likely
  to do
• Link between company management and investors
  comes from this relationship between price and
  expected financial results
• Everything firm does is evaluated by market and
  graded by either an ?, ?, or no change in
  security price

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Alternative Forms of Business Organization

• Sole proprietorship
• Partnership
• Corporation

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Sole Proprietorship

• Advantages
• Ease of formation
• Subject to few regulations
• No corporate income taxes
• Disadvantages
• Limited life
• Unlimited liability
• Difficult to raise equity capital

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Partnership

• A partnership has roughly the same advantages and
  disadvantages as a sole proprietorship

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Corporation

• Advantages
• Unlimited life
• Easy transfer of ownership
• Limited liability
• Ease of raising capital
• Disadvantages
• Double taxation
• Cost of set-up and report filing

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What are shares of Stock?

• Equity
• Stock (Par Value surplus) retained earnings
• A L OE
• Why would stock be worth more (or less) than Book
  Value?
• Publicly traded versus Privately held
• Reporting requirements

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Goal of the Corporation

• The primary goal is shareholder wealth
  maximization, which translates to maximizing
  stock price.

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Managerial Actions to Maximize Shareholder Wealth

• Maximizing earnings per share (great attention is
  given to growth in earnings per share)
• Paying out dividends

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Factors Influenced by Managers that Affect Stock
Price

• Projected earnings per share
• Timing of the earnings stream
• Riskiness of the earnings stream
• Use of debt (capital structure)
• Dividend policy