Introduction to Corporate Finance [Corporate Finance I Studied #1]

This financial management is laid out as a major course for sophomores in the Business Administration department

I’m… taking it because of my double major….

Hmm….. Will my writing really be of help to anyone…? T_TTTTT

Sigh, go go go go start

Ah, the book we’re using is one written by some professor in the Business Administration department at our school,

and you can just think of this as a summary of that book.

It’s a subject that really makes me wonder, do I really even have to study stuff like this?…..

But still, I have to take the exam, and even if my GPA drops my life probably won’t be ruined, but still if I don’t give it my all

I think I’d regret it a little bit later…..so I have no choice….I really have no choice but to do it….seriously….shiver shiver

What is financial management? : the management of money, management that pursues rationality and efficiency in the procurement and operation of funds.

Functions of financial management

Function 1. Among the various sources of fund procurement, finding the optimal source of fund procurement

ex. Seeking ways to minimize the cost of capital : finding the optimal mix that minimizes the cost of capital

cf. Equity capital : common stock issuance, preferred stock issuance

Debt capital : corporate bond issuance, borrowing from banks.

Function 2. Operating decision function (≒ investment decision function): Determining the form and composition of assets the firm will hold (determining the structure of debits and credits)

Through efficient investment, predicting expected future situations as accurately as possible to find the optimal combination of investment proposals.

Function 3. Dividend decision: How much of the profits to distribute to shareholders, and how much of the remainder to retain within the company.

Function 4. Planning and control to help things be properly executed.

Goals of financial management

→ “Maximization of firm value”

Here, firm value is the “market value” evaluated by the firm’s future profitability and risk, which is the firm’s value (i.e., market capitalization)

→ Maximization of shareholder & manager profits

Capital providers : shareholders, creditors

Creditors are merely temporary capital providers, shareholders are the true owners of the firm…

In other words, maximizing the wealth of these shareholder folks can be said to be the goal of financial management.

But, as the firm grows larger and more complex, these folks can’t run it themselves

So they hire managers (separation of ownership and management)

What arises as this happens is the agency problem

Obsessing over performance during their term and only being interested in short-term investment decisions, with No interest in the long-term perspective

In an attempt to solve this, increasing managers’ stock and equity holdings in the firm to represent shareholder interests,

or activating the manager labor market to stir up competition among managers, and such efforts are made to try to overcome the problems;

Development process of financial management

1920s A. Dewing: Organized all the content related to financial analysis and fund management up to that time, laying the foundation

1950s J. Dean: Evaluation of the economic feasibility of investment proposals, laying the foundation of capital budgeting theory

1958, 1961 F. Modigliani and M.H. Miller: Corporate capital structure theory (raising an objection to the existing theory that capital structure does not affect firm value); Dividend theory (the claim that dividend policy has no effect whatsoever on firm value)

1952 H. Markowitz: Portfolio theory (establishing a rational and effective diversified investment theory)

1960s Markowitz’s theory was developed by W. Sharpe, J. Lintner, J. Mossin: into the capital asset pricing model (CAPM)

1973 Black & Scholes: Option pricing model

1976 S. Ross : Arbitrage pricing theory (APT)

Jensen & Meckling : Agency theory, which deals with the problem of agency costs.

That’s all for the introduction,

after this let’s start learning the techniques most used in financial management

The first button of that is the time value of money.

Originally written in Korean on my Naver blog (2016-10). Translated to English for gdpark.blog.