Introduction to Corporate Finance from Cunef Universidad

Introduction to Corporate Finance

Fundamentals of Financial Economics

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In this topic, we learn the basics of corporate finance:
Why corporations exist?
How do they make investment and financing decisions?
How they get financed ?
How they use financial markets to achieve their goals ?
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Outline

01
Investment and
financing decisions
(BMM 1.1)

02
The financial
environment:
Corporations and their
goals (BMM 1.2 - 1.6)

03
Financial markets and
financial
intermediaries: Types
and functions (BMM
2.1 -2.3)

04
Instruments for
corporate financing
(BMM 1.1, 14.3 -
14.6)
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Investment and Financing Decisions

Investment and Financing Decisions

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Financial Decisions: Investment and Financing

01 | Investment and financing decisions
Financial decisions: Investment and financing
· Companies produce goods and services that are purchased by other economic agents
· To carry out their business, companies need a variety of assets, which may be tangible (machinery,
office buildings ... ) or intangible (patents, brand names, customer satisfaction ... ) in which companies
invest
. The funds used to purchase these assets are labeled as the financing of companies
. Financial managers should make two types of financial decisions that answer the questions:
1.
what investments should the corporation make?
2. how should it raise the money for these investments?
· Every decision that a corporation makes ultimately has financial implications
> Corporate finance is the study of how corporations make financial decisions and of the analytical tools
they use to make them
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Investment Decisions

01 | Investment and financing decisions
Investment decisions
· Investment decisions involve the purchase of assets that are meant to contribute to the business's
operations
· Also referred to as capital budgeting, or capital expenditure (CAPEX) decisions
· Investment decisions can involve long-term outcomes (purchasing a plane, building a power plant) or
just very immediate consequences (seasonal advertising campaign)
· Companies prosper only by launching new products or services, and the required investments involve
large costs and risks
· Examples:
· Facebook (Meta) spent $60 million to acquire Pebbles, an Israeli company developing virtual
reality software
. Ford announced plans to invest $1 billion to build an assembly plant in Mexico
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Financing Decisions

01 | Investment and financing decisions
Financing decisions
· The financial manager's second main responsibility is to raise the money that the firm requires for its
investments and operations. This is the financing decision
. If a company needs to invest, it can persuade investors to put up cash in exchange for a share of
future profits, or it can promise to pay back the investors' cash plus some interest in the future
· Broadly, these claims represent their equity and their liabilities
· Notice the essential difference between the investment and financing decisions. Investment implies the
acquisition of real assets; financing implies the issuance financial assets to investors
· Examples:
. John Deere maintained credit lines with banks that allowed it to borrow up to $7.2 billion
· LVMH repaid €750 million in debt issued in 2009 and 2011
· Walmart raised its annual dividend to $2.00 a share
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Differences Between Investment and Financing Decisions

01 | Investment and financing decisions
Differences between investment and financing decisions
Are the following investment or financing decisions?
. Hint: In one case the answer is "both"
a. Intel decides to spend $7 billion to develop a new microprocessor factory
b. BMW borrows 350 million euros from Deutsche Bank
c. Royal Dutch Shell constructs a pipeline to bring natural gas onshore from a production platform in
Australia
d. Avon spends €200 million to launch a new range of cosmetics in European markets
e. Pfizer issues new shares to buy a small biotech company
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The Financial Environment: Corporations and Their Goals

Corporations and Their Goals

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Corporations

02 | The financial environment: Corporations and their goals
Corporations
. A corporation is a legal entity, formed under law by an act of incorporation including articles which set
out the purpose of the business and how it is to be governed and operated
. A corporation is owned by its shareholders, but it is legally distinct from them as shareholders have
limited liability
· Limited liability implies that shareholders cannot be held personally responsible for repaying the
corporation's debt
· Corporations usually have hundreds or thousands of investors who cannot manage or control the
corporation directly. Instead, they elect a board of directors
. In turn, directors appoint and advise top managers (CEOs), and monitor their performance
· Shareholders have voting rights in the Shareholder Meeting
. Corporations are then characterized by a separation of ownership and control
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Other Forms of Business Organization

02 | The financial environment: Corporations and their goals
Other forms of business organization
. Not all businesses can or should be organized in the form of a corporation
· We can organize a local plumbing contractor or barber shop as a corporation, but most corporations
are larger businesses or businesses that aspire to grow. Smaller businesses are usually organized as
sole proprietorships
· In Spain, we talk about trabajadores por cuenta propia, or autónomos
. We can also find businesses where its proprietors voluntarily decide to hold unlimited liability
. These are called partnerships, or, in Spain, we find legal forms such as Sociedades Colectivas or
Comunidades de Bienes
. In some cases, some partners may be involved in the management of the business and have
unlimited liability, while some others may only contribute with funding and have limited liability.
These hybrid forms of businesses are limited partnerships. In Spain, we find Sociedades
Comanditarias
. There is a wide range of legal forms or definitions of companies that we will not cover in this course
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Measuring a Corporation's Activity

02 | The financial environment: Corporations and their goals
Measuring a corporation's activity
· How large is a company? How successful is its business?
. There exist a broad range of metrics that capture the dimension, and the performance of a
corporation's activities
. Here, we introduce five main variables to measure the dimension of a business:
1. Market capitalization (in short, Market cap)
2. Assets
3. Sales (also known as revenue)
4. Earnings (also known as profit, or net income)
5. Number of employees
. Notice that a company being large from one perspective, say market cap, is not directly linked to being
large from another, say value of sales
. In Topic 3 of this course, we will deal more in detail with the quantification and evaluation of a
company's performance
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Market Capitalization

f
The Largest Companies in the World in 2020
Top 100 by Market Capitalization*
Industry
Banking
Consumer durables
Food. Drink &
Tobacco
Household
& Personal Products
Materials
Retailing
Business Services
& Supplies
Diversified
Financials
Health Care
Equipment & Services
Insurance
Media
Semiconductors
Conglomerates
Drugs &
Biotechnology
Hotels, Restaurants
& Leisure
IT Software &
Services
Oil & Gas
Operations
Technology Hardware &
Equipment
Telecommunications
Services
Europe
Other
Walmart
$387B
HETFLEE
$209B Curtir
BATT
$339B
SAP
Costco
amazon
AHOME
$2998
$2120
$2218
ORACLE TAT
$1.5T
Roche
42038
Asia
$2248
intel
$3088 ( ....***
O
$2095
NVIDIA
$3058
ASML
$3618
$711B
CISCO
M
ICBC
$2348
M
tsmc
NIKE
BHP
CSL
$390B
P
VISA
Oceania
$2788
$214B
$429B
ارامكو السعودية
Soudi Aramco
$3018
Pfizer
$1.9T
MasterCard
$329B
SIT
$1.8T
$2168 Kolwwwvon
citi
13020
Shee
verizon
$2458
$100B
HATHAWAY
MERCK
$2108 OCENY AMGEN $499B
Market capitalization ($)
" Data as of September 25th, 2020
Article & Sources:
https://howmuch.net/articles/largest-companies-in-the-world-2020
Yahoo Finance . https://finance.yahoo.com
howMuch.net
Introduction to Corporate Finance
Source: howmuch. For a more recent ranking of companies, visit VisualCapitalist
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SAMSUNG
$330B
Alphabet
$969B
P&G
$341B
LVMH
$2338
LOREAL
$2098
IBM
PAGAN
$2018
Microsoft
$1.5T
Tencent Rik
$637B
$282B
$500B
AT&T
12005
Reliance
EL
Alibaba.com
$729B
TATA
efimien
$392B
North
America
52008
3
f
Exxon
Mobil
ALI

Assets

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02 | The financial environment: Corporations and their goals
Assets
BIGGEST COMPANIES IN THE WORLD BY ASSETS, IN $ MILLIONS (2022)
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000 ~
$6,000,000
ICBC (China)
China Construction Bank (China)
Agricultural Bank of China (China)
Fannie Mae (United States)
Bank of China (China)
JPMorgan Chase (United States)
Bank of America (United States)
Mitsubishi UFJ Financial (Japan)
Freddie Mac (United States)
BNP Paribas (France)
HSBC Holdings (United Kingdom)
Introduction to Corporate Finance
Source: Forbes 2000 List 2022
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Sales (Revenue)

02 | The financial environment: Corporations and their goals
Sales (Revenue)
VISUAL CAPITALIST DATASTREAM
G
ALPHABET
$142B
$183B
COSTCO
$161B
$167B
AT&T
$165B
$172B
APPLE
$170B
$275B
EXXON MOBIL
$210B
$182B
BERKSHIRE HATH.
$231B
Walmart is America's largest
employer with roughly 2.3 million
people on its payroll. This results in
relatively high operating expenses.
CVS HEALTH
$255B
$269B
a
AMAZON
$363B
$386B
--------
Military spending is one
of America's largest
expenditures, and was
included to provide
additional context.
WALMART
$537B
$559B
U.S. MILITARY SPENDING
$778B
Cost of operations includes selling, general & administrative
expenses (SG&A) and cost of goods sold (COGS).
Financial data was collected from each
company's most recent fiscal year end.
SOURCE: SEC (2021)
Introduction to Corporate Finance
Source: VisualCapitalist
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THE COST TO RUN
CORPORATE AMERICA
2020, USD
COST OF OPERATIONS (2020)
REVENUE (2020)
Apple had the greatest operating
margin, at 38%. A higher figure
suggests that a company is efficient
at translating sales into profits.
$246B