McGraw.Hill - Brealey & Myers - Principles of Corporate Finance, 6th Edition Slides
Managing Global Financial Risk
Using Currency Futures
Currency Options
Principles of Corporate Finance
Brealey and Myers Sixth Edition
u Finance and the Financial Manager
Chapter 1
2
Topics Covered
w What Is A Corporation?
w The Role of The Financial Manager
w Who Is The Financial Manager?
w Separation of Ownership and Management
w Financial Markets
3
Corporate Structure
Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships
Limited Liability
Corporations Corporate tax on profits +
Personal tax on dividends
4
Role of The Financial Manager
(2) (1)
Firm's Financial Financial
(4a)
operations manager markets
(3) (4b)
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
5
Who is The Financial Manager?
Chief Financial Officer
Treasurer Comptroller
6
Ownership vs. Management
Difference in Information Different Objectives
w Stock prices and w Managers vs.
returns stockholders
w Issues of shares and w Top mgmt vs.
other securities operating mgmt
w Dividends w Stockholders vs. banks
w Financing and lenders
7
Financial Markets
Money
Primary OTC
Markets Markets
Secondary
Markets
8
Financial Institutions
Company
Obligations
Funds
Intermediaries
Banks
Insurance Cos.
Brokerage Firms
9
Financial Institutions
Intermediaries
Obligations
Funds
Investors
Depositors
Policyholders
Investors
Principles of Corporate Finance
Brealey and Myers Sixth Edition
u Present Value and The Opportunity
Cost of Capital
Chapter 2
11
Topics Covered
w Present Value
w Net Present Value
w NPV Rule
w ROR Rule
w Opportunity Cost of Capital
w Managers and the Interests of Shareholders
12
Present Value
Present Value Discount Factor
Value today of Present value of
a future cash a $1 future
flow. payment.
Discount Rate
Interest rate used
to compute
present values of
future cash flows.
13
Present Value
Present Value = PV
PV = discount factor × C1
14
Present Value
Discount Factor = DF = PV of $1
DF = 1
(1+ r ) t
Discount Factors can be used to compute the present value of
any cash flow.
15
Valuing an Office Building
Step 1: Forecast cash flows
Cost of building = C0 = 350
Sale price in Year 1 = C1 = 400
Step 2: Estimate opportunity cost of capital
If equally risky investments in the capital market
offer a return of 7%, then
Cost of capital = r = 7%
16
Valuing an Office Building
Step 3: Discount future cash flows
PV = C1
(1+r) = 400
(1+.07) = 374
Step 4: Go ahead if PV of payoff exceeds investment
NPV = −350+ 374= 24
17
Net Present Value
NPV = PV - required investment
C1
NPV = C0 +
1+ r
18
Risk and Present Value
w Higher risk projects require a higher rate of
return.
w Higher required rates of return cause lower
PVs.
PV of C1 = $400 at 7%
400
PV = = 374
1 + .07
19
Risk and Present Value
PV of C1 = $400 at 12%
400
PV = = 357
1 + .12
PV of C1 = $400 at 7%
400
PV = = 374
1 + .07
20
Rate of Return Rule
w Accept investments that offer rates of return
in excess of their opportunity cost of capital.
Example
In the project listed below, the foregone investment
opportunity is 12%. Should we do the project?
profit 400,000 − 350,000
Return = = = .14 or 14%
investment 350,000
