Corporate Finance(公司金融讲义上海交大 Fei YIwen )

CorporateFinanceInstructor:FeiYiwenE-mail:ywfei@CorporateFinanceSubdisciplineofeconomics–

ThetheoryofthefirmRequiresanunderstandingofThebankingsystemTheoperationofmoneyCapitalmarketsCorporateFinanceObjectiveWealthmaximizationStrategyAcquisition,financingand

managementofASSETSOperationalConsiderationsAssetAcquisition

Whicharethebestassetstobuy? Whenshouldyoubuythem?OperationalConsiderationsAssetFinancing

Whatisthebesttypeoffinancing? Whatisthebestfinancingmix?OperationalConsiderationsAssetManagementHowdoyouachievethemostefficientassetmix?CashflowconsiderationsOperationalConsiderationsWealthMaximizationCashflowsTimingRiskversusReturnGoal=steadilyappreciatingsharepriceAgencyRelationshipsAgencyCostsManagementincentivesMonitoringexpensesBondingexpensesOpportunitycostInefficientagencyrelationships=agencyproblemsWealthMaximizationProfit-usefulbutignoresRiskTimevalueofmoneyWealthMaximizationCashFlow-equityanddebtNetPresentValue(NPV)ThepresentvalueofallfuturecashflowsminusinitialcostOtherConsiderationsEthics

MoraldutyandobligationPublicrelationsInvestorconfidenceCareerProspectsCFO–overallresponsibility-FinancialPolicy-CorporatePlanningTreasurerCashManagementRaisingCapitalControllerFinancialStatementsKeyPointsSoFarMaximizeShareholderwealththroughtheAcquisition,financingandmanagementofassetsthatmaximizereturnswhilstminimizingtherisksGoal=steadilyappreciatingsharepriceCourseObjectiveTheobjectiveofthismoduleistobuildanunderstandingofsomeconceptsthatarefundamentaltothestudyofcorporatefinanceandassetpricing.Inadditiontosupportingabasicunderstandingoffinance,theseconceptsareusedinmanyotherfinancecoursesthatyoumightsubsequentlytake.Thetopicscoveredinclude(i)RiskandreturnwithspecialattentiontotheCapitalAssetPricingModel(CAPM)(ii)TheInformationalEfficiencyofCapitalMarkets(iii)Theuseofdebtandequityinthecompany’scapitalstructure(iv)Financialoptionsandtheanalysisofcorporatesecuritiesascontingentclaims.Textbook*Ross,S.A.,R.W.WesterfieldandJ.F.Jaffe,CorporateFinance,6thedition,2002/2003.McGraw-Hill&ChinaMachinePress.Suggestedreferencetext:BrealeyandMyers,PrinciplesofCorporateFinance,6thedition,2000,PrenticeHall&ChinaMachinePress.EvaluationClassParticipation10%Presentation&CaseStudy40%FinalTest50%

*Assignments-CaseStudyorCalculationmustbesubmitted.HomeworkDouble-spacedtypedpages(notincludingtablesorchartsthatyoumaywishtoadd)SubmitthehomeworkintheformatofWordThehomeworkshouldbesubmittedbeforeDeadline.ThepresentationEverygroupwillhaveachancetogivetheirpresentationtotheclass.Thedetailinformationisavailableintheoutlineofthiscourse.ObservationsaboutthiscourseItisconsistentwithwhatiscoveredineverymajorinternationalprogramThetextisusedby80%oftopprogramsStudentfeedback:AdifficultcoursethatrequiresworkNOTE:Idonotassumethatyouhavepriortraininginfinancebeyondthecore.Chapter1IntroductionFinance:thestudyofmarketsandinstrumentsthatdealwithcashflowovertimeCorporateFinanceInvestmentBankingInsuranceRealestatePublicFinanceThebalanceSheetCurrentAssetsCurrentLiabilitiesFixedAssetsLong-termdebtShareholders’equityKeyQuestionsInwhatlong-livedassetsshouldthefirminvest?CapitalbudgetingandexpenditureHowcanthefirmraisecashforrequiredcapitalexpenditure?CapitalstructureHowshouldshort-termoperatingcashflowsbemanaged?NetworkingcapitalPrimarilyaCorporateFinancePointofViewSAVERS/INVESTORSTheCorporation-RealAssetsFinancialMarkets-financialassetsInvestmentManagementCorporateFinancialManagerTheinterplayofthefirm’sfinancewiththefinancialmarket

(A)(E)(C)(F)FirminvestsInassets(B)CurrentAssetsFixedAssetsFinancialMarketShort-termdebtLong-termdebtEquitySharesGovernment(D)TheCorporateFirmTheSoleProprietorshipThePartnership

GeneralpartnershipLimitedpartnershipTheCorporationTheSoleProprietorshipThecheapestbusinessNocorporateincometaxes,butindividualincometaxesUnlimitedliabilityThelifeofsoleproprietorshipislimitedTheequitymoneyislimitedtotheproprietor’spersonalwealthThePartnership(1)Generalpartnership--allpartnersagreetoprovidesomefractionoftheworkandcashandtosharetheprofitsandlosses.Limitedpartnerships--theliabilityofsomeofthepartnerstobelimitedthetheamountofcasheachhascontributed.ThePartnership(2)Partnershipsareinexpensiveandeasytoform.Generalpartnershaveunlimitedliability.ThelifeofgeneralpartnershipislimitedRaisinglargeamountofcashisdifficult.PersonalincometaxManagementcontrolresidewiththegeneralpartnersTheCorporation

AdvantageOwnershipcanbereadilytransferredTheunlimitedlifeTheshareholders’liabilityislimitedtotheamountinvestedintheownershipshares.

DisadvantageThedoubletaxationforshareholdersAComparisonofPartnershipandCorporations

LiquidityandmarketabilityVotingrightsTaxationReinvestmentanddividendpayoutLiabilityContinuityofexistenceGoalsoftheCorporateFirms(1)AgencyCostandtheprincipal-agentrelationship

Jensen&Meckling,“TheoryoftheFirm:ManagerialBehavior,AgencyCostsandOwnershipStructure”,JournalofFinancialEconomics3(1976).

--ThecostofresolvingtheconflictsofinterestbetweenmanagersandshareholdersThemonitoringcostsoftheshareholdersThecostsofimplementingcontroldevicesGoalsoftheCorporateFirms(2)ManagerialGoals

Williamson:expensepreferenceDonaldson:corporatewealthSeparationofOwnershipandControl

--Doshareholderscontrolmanagerialbehavior?GoalsoftheCorporateFirms(3)

Doshareholderscontrolmanagerialbehavior?Shareholdersmeeting–theboardofdirectors–themanagementteamCompensation,suchasoptionTakeoversCompetitioninmanageriallabormarketChapter2NetPresentValueThetimevalueofmoneyCompoundingperiodsCasestudyTimeValueofMoneyCashflowsoccuroveraperiodoftimeInflationerodesthevalueofmoneyovertimeWhatarethevalueofthosecashflowsinTODAY’S

moneyThetimevalueofmoney(1)Tostudytherelationshipbetweenadollartodayanda(possibleuncertain)dollarinthefutureFuturePresentvalueThetimevalueofmoney(2)NetPresentValueFutureValueandCompoundingSimpleinterest:FV=C*(1+T*r)Compoundinterest:FV=C*(1+r)TJuliewantstoknowhowlargeher$10,000depositwillbecomeatacompoundinterestrateoffor5years.Example

012345$10,000FV510%SolutionCalculationbasedongeneralformula:

FVn =P0(1+i)n

FV5

=$10,000(1+0.10)5 =$16,105.10ProblemJuliewantstoknowhowlargeadeposittomakesothatthemoneywillgrowto

$10,000

in5

yearsatadiscountrateof

10%.

012345$10,000PV010%SolutionCalculationbasedongeneralformula:

PV0 =FVn/(1+i)n

PV0 =$10,000/(1+0.10)5 =$6,209.21ThePowerofCompoundingTheUSstockmarketreturnedasawholefrom1926through1996(annualrateofreturnis10.71%)Simpleinterest:$1*(1+71*10.71%)=$7.6Compoundinterest:$1*(1+10.71%)71=$1371.71PresentValueandDiscounting(1)Discounting:Theprocessofcalculatingthepresentvalueofafuturecashflow.Itistheoppositeofcompounding.PresentValueandDiscounting(2)

$2367.36

$1900

$1000$1000$422.41010thyearCompoundingperiods(1)CompoundinganinvestmentmtimesayearEffectiveannualinterestrateCompoundingperiods(2)Foraninvestmentoveroneormore(T)yearsContinuousCompoundingFV=C0*er*t(e=2.718)Simplifications(1)Perpetuity–Consols(BritishBonds)GrowingPerpetuitySimplifications(2)Annuity--alevelstreamofregularpaymentslastingforafixednumberofperiodsGrowingAnnuityCaseStudy(1)HaroldandHelenaresavingforthecollegeeducationoftheirnewborndaughter,Susan.Theyestimatethatcollegeexpenseswillrun$30,000peryearwhentheirdaughterreachescollegein18years.Theannualinterestrateoverthenextfewdecadeswillbe14percent.Howmuchmoneymusttheydepositinthebankeachyearsothattheirdaughterwillbesupported?CaseStudy(1)Tocalculatethepresentvalueofthefouryearsatcollegeusingtheannuityformula.TocalculatethePVatdate0asCaseStudy(1)3.Tocalculatetheannualdepositattheendofeachofthe17years4.Iftheyplantoincreasetheirpaymentsat4%peryear.CaseStudy(2)In1987,RosalindSetchfieldwonmorethan$1.3millionintheArizonastatelottery.Thewinningsweretobepaidin20yearlyinstallmentsof$65,276.79.Sixyearslater,in1995,Mrs.SetchfieldreceivedaphonecallfromasalesmanfortheSingerAssetFinanceCompany.Theyoffertogiveher$140,000immediatelyforone-halfofthenextninelotterychecks.RatesofInterestNominalversusEffectiverateNominal=theannualrateEffective=istheratederivedafterthenominalinterestratehasbeencalculated(compounded)severaltimesintheyearEffectiveAnnualInterestRate(1+[i/m])m-1Formula:BasketWondershasa

$1,000

CDatthebank.Theinterestrateis

6%compoundedquarterly

for1year.WhatistheEffectiveAnnualInterestRate(EAR)?

EAR =(1+6%/4)4-1 =1.0614-1=.0614or

6.14%!Chapter3FinancialMarketsandNPVMoneymarkets&CapitalmarketsTheprimarymarkets&thesecondarymarketWhatisCapitalBudgeting?

Theprocessofidentifying,analyzing,andselectinginvestmentprojectswhosereturns(cashflows)areexpectedtoextendbeyondoneyear.TheCapitalBudgetingProcessGenerateinvestmentproposalsconsistentwiththefirm’sstrategicobjectives.Estimateafter-taxincrementaloperatingcashflowsfortheinvestmentprojects.Evaluateprojectincrementalcashflows.Selectprojectsbasedonavalue-maximizingacceptancecriterion.Reevaluateimplementedinvestmentprojectscontinuallyandperformpost-auditsforcompletedprojects.ClassificationofInvestmentProjectProposals1.NewProductsorexpansionofexistingproducts2.Replacementofexistingequipmentorbuildings3.Researchanddevelopment4.Exploration5.Other(e.g.,safetyorpollutionrelated)CalculatingtheIncrementalCashFlowsInitialcashoutflow--theinitialnetcashinvestment.Interimincrementalnetcashflows--thosenetcashflowsoccurringaftertheinitialcashinvestmentbutnotincludingthefinalperiod’scashflow.Terminal-yearincrementalnetcashflows--thefinalperiod’snetcashflow.ExampleofanAssetExpansionProjectBasketWonders(BW)-newbasketweavingmachine.Cost$50,000plus$20,000forshippingandinstallation.Networkingcapital(NWC)willriseby$5,000.Revenueswillincreaseby$40,000foreachofthenext4years.Machinetobesold(scrapped)for$10,000atprojectend.Operatingcostswillriseby$70,000perfouryear.BWisinthe40%taxbracket.InitialCashOutflowa)Costofasset$50,000b)+Capitalisedexpenditures+20,000c)+/-In(de)creasedNWC+5,000d)-Netproceedsfromsaleofoldasset(ifreplacement)0e)+/-Taxes(savings)duetod)0f)Initialcashoutflow$75,000IncrementalCashFlows

Year1

Year2

Year3

Year4.a)netinoper.revenue $40,000$40,000$40,000$40,000.b)+/-netintaxdeprec. -23,331-31,115-10,367-5,187.c)=netinincomebftax $16,669$8,885$29,633$34,813.d)+/-netintaxes -6,668-3,554-11,853-13,925.e)+/-netininc.aftertax $10,001$5,331$17,780$20,888.f)+/-netintaxdeprec.charges 23,33131,11510,3675,187.g)Incrementalnetcashflow

$33,332$36,446$28,147$26,075.where=change.Terminal-YearIncrementalCashFlowsa) Incrementalcashflowfrom

previousslideinYear4. $26,075b) +/-SalvageValue +10,000c) +/-Taxortaxsavingsduetosale .40*($10,000-0) -4,000*d) +/-levelofNWC-Projectends. +5,000e) =Terminal-yearincrementalcashflow $37,075

*Note,theassetisfullydepreciatedattheendofYear4.SummaryofProjectNetCashFlowsAssetExpansion

Year0

Year1

Year2

Year3

Year4-$75,000

$33,332 $36,446 $28,147$37,075InGeneral,theValueofanActionMarketValueofFinancialInstrumentDependsonCashFlowCharacteristicsandRequiredReturnrtOpportunityCostrtSupposeaninvestorisconsideringbuyingsecurityA.Awillonlybepurchasediftheexpectedreturnisatleastashighasthereturnthatcouldhavebeenearnedelsewhere.Theamountthatcouldhavebeenearnedelsewhereistheopportunitycostortherequiredreturnontheasset.WhenwecomputeNPV,wediscountattherequiredreturn.ThefinancialmarketeconomyYAB$60,000$50,000ConsumptionnextyearConsumptionthisyearA=$60,000+($50,000*(1+0.1))B=$50,000+($60,000/(1+0.1))$115,000$104,545InthecompetitivemarketSlope=-1.5,lendingSlope=-1.1,BorrowingYCorporateInvestmentDecisionMakingTheBasicFinancialPrincipleofInvestmentDecisionMaking

Aninv