1-2
The Balance-Sheet Model of the Firm
The Capital Structure Decision
(Financing Decision)
Current Assets
Fixed Assets 1 Tangible
How can the firm raise the money for the required investments?
Long-Term Debt
Fixed Assets 1 Tangible 2 Intangible
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What longterm investments should the firm engage in?
Corporate Finance
Shareholders’ Equity
2 Intangible
Current Liabilities Long-Term
Debt
Shareholders’ Equity
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Corporate Finance
1-3
The Balance-Sheet Model of the Firm
The Net Working Capital Investment Decision
Introduction to 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 money for the required investments?
Total Value of Assets:
Current Assets
Total Firm Value to Investors:
Current Liabilities
Long-Term Debt
Fixed Assets 1 Tangible 2 Intangible
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Invests in assets
(B)
Retained cash flows (F)
Current assets
Cash flow Dividends and
Fixed assets from firm (C) debt payments (E)
Financial markets
Short-term debt Long-term debt Equity shares
pie, then the capital structure decision
matters.
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Corporate Finance
1-5
The Firm and the Financial Markets
Firm
Firm issues securities (A)
Current Assets
(Financial Decision)
Net Working Capital
Current Liabilities
Long-Term Debt
Fixed Assets 1 Tangible 2 Intangible
How much shortterm cash flow does a company need to pay its bills?
2750%50%30% DebtDeEbtquity
The Capital Structure decision can be viewed as
5705% Equity
how best to slice up a the
pie.
If how you slice the pie affects the size of the
• Secondary Markets
– Involve the sale of “used” securities from one investor to another.
3. How much short-term cash flow does a company need to pay its bills?
4.
(RWJ ch.1)
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Corporate Finance
1-0
The Balance-Sheet Model of the Firm
1-6
Financial Markets
• Primary Market
– When a corporation issues securities, cash flows from investors to the firm.
– Usually an underwriter is involved
Taxes (D)
Ultimately, the firm must be a cash generating activity.
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Government
Corporate Finance
The cash flows from the firm must exceed the cash flows from the financial markets.
Shareholders’ uity
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Corporate Finance
1-4
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.
Corporate Finance
Shareholders’ Equity
1-1
The Balance-Sheet Model of the Firm
The Capital Budgeting Decision
Current Assets
(Investment Decision)
Current Liabilities