Corporate Finance Chapter 1 What is Corporate Finance? Capital Structure, Hypothetical Organization Chart, Debt and Equity as Contingent Claims

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S 1: Introduction to Corporate Finance

S 2: Chapter Outline

1.1 What is Corporate Finance?

1.2 Corporate Securities as Contingent Claims on Total Firm Value

1.3 The Corporate Firm

1.4 Goals of the Corporate Firm

1.5 Financial Markets

1.6 Outline of the Text 

S 3: What is Corporate Finance?

Corporate Finance addresses the following three questions:

1.What long-term investments should the firm engage in?

2.How can the firm raise the money for the required investments?

3.How much short-term cash flow does a company need to pay its bills?

S 4: The Balance-Sheet Model of the Firm

S 5: The Balance-Sheet Model of the Firm

S 6: The Balance-Sheet Model of the Firm

S 7: The Balance-Sheet Model of the Firm

S 8:Capital Structure

• The value of the firm can be thought of as a pie.
• The goal of the manager is to increase the size of the pie.
• The  Capital Structure decision can be viewed as how best to slice up a the pie.
• If how you slice the pie affects the size of the pie, then the capital structure decision matters.

S 9: Hypothetical Organization Chart

S 10:The Financial Manager

To create value, the financial manager should:

     1.Try to make smart investment decisions.

     2.Try to make smart financing decisions.

S 11: The Firm and the Financial Markets

S 12:1.2 Corporate Securities as Contingent Claims on Total Firm Value

• The basic feature of a debt is that it is a promise by the borrowing firm to repay a fixed dollar amount of by a certain date.
• The shareholder’s claim on firm value is the residual amount that remains after the debtholders are paid.
• If the value of the firm is less than the amount promised to the debtholders, the shareholders get nothing.

S 13: Debt and Equity as Contingent Claims

S 14:Combined Payoffs to Debt and Equity

S 15:1.3 The Corporate Firm

• The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.
• However, businesses can take other forms.

S 16: Forms of Business Organization

• The Sole Proprietorship
• The Partnership

1. General Partnership
2. Limited Partnership

• The Corporation
• Advantages and Disadvantages

1. Liquidity and Marketability of Ownership
2. Control
3. Liability
4. Continuity of Existence
5. Tax Considerations

S 17: A Comparison of Partnership and Corporations

S 18: 1.4 Goals of the Corporate Firm

• The traditional answer is that the managers of the corporation are obliged to make efforts to maximize shareholder wealth.

S 19: The Set-of-Contracts Perspective

• The firm can be viewed as a set of contracts.
• One of these contracts is between shareholders and managers.
• The managers will usually act in the shareholders’ interests.
• The shareholders can devise contracts that align the incentives of the managers with the goals of the shareholders.
• The shareholders can monitor the managers behavior.
• This contracting and monitoring is costly.

S 20: Managerial Goals

• Managerial goals may be different from shareholder goals
• Expensive perquisites
• Survival
• Independence
• Increased growth and size are not necessarily the same thing as increased shareholder wealth.

S 21: Separation of Ownership and Control

S 22: Do Shareholders Control Managerial Behavior?

• Shareholders vote for the board of directors, who in turn hire the management team.
• Contracts can be carefully constructed to be incentive compatible.
• There is a market for managerial talent—this may provide market discipline to the managers—they can be replaced.
• If the managers fail to maximize share price, they may be replaced in a hostile takeover.

S 23: 1.5 Financial Markets

• Primary Market

1. When a corporation issues securities, cash flows from investors to the firm.
2. Usually an underwriter is involved

• Secondary Markets

1. Involve the sale of “used” securities from one investor to another.
2. Securities may be exchange traded or trade over-the-counter in a dealer market. 

S 24:Financial Markets

S 25: Exchange Trading of Listed Stocks

• Auction markets are different from dealer markets in two ways:
• Trading in a given auction exchange takes place at a single site on the floor of the exchange.
• Transaction prices of shares are communicated almost immediately to the public.

S 26: 1.6 Outline of the Text

I.Overview

II.Value and Capital Budgeting

III.Risk

IV.Capital Structure and Dividend Policy

V.Long-Term Financing

VI.Options, Futures and Corporate Finance

VII.Financial Planning and Short-Term Finance

VIII.Special Topics

Business Strategy Chapter 11 Building an Organization Capable of Good Strategy Execution

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S 1:Building  an  Organization  Capable  of  Good  Strategy  Execution
S 2:Executing  the  Strategy:

—An action-oriented, make-things happen task involving management’s ability to

—Direct organizational change

—Achieve continuous improvement in
operations and business processes

—Move toward operating excellence

—Create and nurture a
strategy-supportive culture

—Consistently meet or beat performance targets

—Tougher and more time-consuming than crafting strategy

S 3:Goals  of  the  Strategy Implementing-Executing  Process

—Unite total organization behind strategy

—See that activities are done in a manner that is conducive to first-rate strategy execution

—Generate commitment so an enthusiastic
crusade emerges to carry out strategy

—Fit how organization conducts its
operations to strategy requirements

S 4:Fig. 11.1:  The Eight Components of the Strategy Execution Process

S 5:What Top Executives Have to Do in Leading the Implementation Process

—Communicate the case for change

—Build consensus on how to proceed

—Arouse enthusiasm for the strategy to turn implementation process into a company wide crusade

—Empower subordinates to keep process moving

—Establish measures of progress and deadlines

—Reward those who achieve
implementation milestones

—Direct resources to the right places

—Personally lead strategic change process
and the drive for operating excellence

S 6:Fig. 11.2:  The Three Components of Building an Organization Capable of Proficient Strategy Execution

S 7:Three-Stage  Process  of  Developing  Competencies  and  Capabilities:

1.  Develop ability to do something

2.  As experience builds,
ability can translate into a
competence or capability

3.  If ability continues to be polished and refined, it can become a distinctive competence, providing a path to
competitive advantage!

S 8:Fig. 11.3:  Structuring the Work Effort to Promote Successful Strategy Execution

S 9: Step 1:Decide Which Value Chain Activities to Perform Internally and Which to Outsource:

—Involves deciding which activities are
essential to strategic success

—Most strategies entail certain crucial business processes or activities that must be performed exceedingly well or in closely coordinated fashion if the strategy is
to be executed with real proficiency

—These processes/activities usually
 need to be performed internally

—Other activities, such as routine
administrative housekeeping and
some support functions, may be
candidates for outsourcing

S 10: Step 2:Make Strategy-Critical Activities the Main Building Blocks

—Assign managers of strategy-critical activities a visible, influential position

—Avoid fragmenting responsibility for strategy-critical activities across many departments

—Provide coordinating linkages
between related work groups

—Meld into a valuable
competitive capability

Assign managers key roles

Primary  activities | Support functions

Strategic relation-ships | Coordi-nation | Valuable capability

S 11:Step 3:Determine How Much Authority to Delegate to Whom

—In a centralized structure

—Top managers retain authority
for most decisions

—In a decentralized structure

—Managers and employees are
empowered to make decisions

—Trend in most companies

—Shift from authoritarian to decentralized
structures stressing empowerment

S 12:Advantages and Disadvantages of Centralized versus Decentralized Decision Making

S 13:Step 4:Provide for Internal Cross-Unit Coordination

—Classic method of coordinating activities – Have related units report to single manager

—Upper-level managers have clout to
coordinate efforts of their units

—Support activities should be
woven into structure to

—Maximize performance of primary activities

—Contain costs of support activities

—Formal reporting relationships often need to be supplemented to facilitate coordination

S 14:Step 5:Provide for Collaboration With Outsiders  

—Need multiple ties at multiple levels to ensure

—Communication

—Coordination and control

—Find ways to produce collaborative
efforts to enhance firm’s capabilities
and resource strengths

—While collaborative relationships present opportunities, nothing valuable is realized until the relationship develops into an engine for better organizational performance

S 15:Current  Organizational  Trends

—Numerous companies have completed the task of remodeling traditional, hierarchical structures built on

—Functional specialization and

—Centralized authority

—Corporate downsizing movement in the
late 1980s and early 1990s was aimed at

—Recasting authoritarian, pyramidal
organizational structures

—Into flatter, decentralized structures 

S 16:Organizational Structures of the Future: Overall Themes

—Revolutionary changes in how work is organized have been triggered by

—New strategic priorities

—Rapidly shifting competitive conditions

—Tools of organizational design include

—Empowered managers and workers

—Reengineered work processes

—Self-directed work teams

—Rapid incorporation of Internet
technology

—Networking with outsiders