Skip to main content

Finance Theory I - Week 1 - Complete

Chapter 1 - Value - Goals and Governance of the Firm

Corporations invest in real assets
-generate cash inflows and income
-tangible - machinery, buildings
-intangible - brand names, patents

Financial manager faces two questions
-what investments should the corporation make - involves spending money
-how should it pay for those investments - involves raising money

Secret of success is to increase value of the corporation and stock price
-how to do it?
-how well all managers and employees work to increase value
-identify risks and make sure they are managed properly

Corporation can
-invest in new assets
-or give cash back to shareholders

Opportunity cost of capital that shareholder contribute
-can the corporation add value and earn a higher return than shareholders can earn for themselves

Reoccurring themes
-Maximizing value
-Opportunity cost of capital
-Crucial importance of incentives and governance

Financial asses or securities
-corporation sells claims on the assets and on the cash flow that they will generate
-a bank loan is not a security because it is held by the bank - not sold and traded
-a bond is because it can be held and traded in financial markets

Investment decision = purchase of real assets
-capital budgeting or capital expenditure (CAPEX)
-today's capital investments generate future returns - wait for cash to flow back - must pay attention to the timing, not just cumulative amount - rarely certain
-also involves managing assets already in place and deciding when to shut down and dispose of assets if profits decline
-manage and control the risks of its investments
-raising cash today
-meet obligations to banks, bondholders, and stockholders

Financing decision = sale of financial assets
-shareholders are equity investors who contribute equity financing
-capital structure decision - choice between debt and equity financing
-raise equity financing either by issuing new shares of stock or reinvest cash raised from existing assets

Financing are somewhat less important than investment decisions
Value comes mainly from the asst side of the balance sheet

-legal entity, a legal person owned by its shareholders (but legally distinct from them)
 -shareholders have limited liability - cannot be held responsible for corporation's debts
-can make contracts, carry on a business, borrow or lend money, and sue or be sued
-pay taxes but cannot vote
-formed under state law, based on articles of incorporation that set out the purpose of the business and how it is to be governed an operated
-board of directors - choose and advise top management and sign off on some corporate actions
-closely held - privately held shares
-public companies -shares traded in public markets
-separation of ownership and control - hundreds of thousands of shareholders who own the business but couldn't possibly manage or control it
 -gives the corporation permanence - can sell shares without disrupting operations
-Chief financial officer (CFO) oversees the work of all financial staff - deeply involved in financial policy and financial planning - in constant contact with CEO - explains earnings results and forecasts to investors and the media
-Treasurer is responsible for short-term cash management, currency trading, financing transactions, and bank relationships
-Controller manages company's internal accounting systems, oversees preparation of financial statements and tax returns

Flow of money from investors to the corporation and back again
1)cash raised by selling financial assets to investors
2)cash invested in firm's operations and purchase real assets
3)cash generated by firm's operations
4a)cash reinvested or 4b)cash returned to investors

As long as investments offer higher rates of return than its shareholder can earn in the stock market
Hurdle rate or cost of capital - minimum rate of return - opportunity cost of capital because it depends on the investment other opportunities available - estimating this is one of the hardest tasks
Maximize profits - which years profits?

Stakeholders - employees, customers, suppliers, and community 
US and UK believe dividends should come first
Japanese, German, and French - job security should come first

Separation of ownership and control
-stockholders may not agree with management decisions - creates agency problems
-Agency costs - managers do not attempt to maximize value and shareholders incur costs to monitor managers - occur when managers do not act in their own interests instead of shareholders
-Corporate governance compensation schemes designed to align managers and shareholders interests
-Managers have a legal duty to act responsibly and in the interest of investors - prohibits insider trading, purchase or sale based on information not available publicly 
-Compensation plans - huge personal stake in the success of the firm
-Board of Directors - elected by shareholders - required to have independent directors that are not managers or affiliated with management
-Monitoring - security analysts that advise investors to buy, hold, or sell 
-Takeovers - consistently fail to maximize value - common in industries with slow growth and excess capacity
-Shareholder pressure - Wall Street Walk - when enough share holder bail out, the stock price goes down


Add words to blank spaces 1)Companies usually buy real assets. These include both tangible assets such as airplanes and intangible assets such as brand names. To pay for these assets, they sell financial assets such as bonds. The decision about which assets to buy is usually termed the capital budgeting or investment decision. The decision about how to raise the money is usually termed the financing decision.

2)Which of the following are real assets, and which are financial?
A share of stock - financial
A personal IOU - financial
A trademark - real
A factory - real
Undeveloped land - real
The balance in firm's checking account - real
An experienced and hardworking sales force - real
A corporate bond - financial

3)Explain the difference between
Real assets - generate income
Financial assets - claims on assets

4)Which of these always apply to corporations?
Unlimited liability
Limited life
Ownership can be transferred without affecting operations
Managers can be fired with no effect on ownership

5)Which of the following statements more accurately describe the treasurer than the controller?
Responsible for investing the firm's spare cash
Arranging any issue of common stock
Tax affairs


If you're reading this than you can empathize with my sorrow of losing my notes from the lecture. I used ctrl + c to move them from another page, but did not ctrl + v before I replaced them on the computer's clipboard by copying the link to the lecture (hyperlinked above). 
I've just spent an inordinate amount of time trying to recover the notes, but I can't find a way. I've, at least, installed an extension to my Chromebook that will keep a history of my clipboard to prevent future catastrophes.
I could listen to the lecture again to recreate the notes, but unless someone insists, I am not going to do that. I usually add my notes as a verification that I have watched and learned from the lecture but this time you'll have to take my word. Above are the notes from chapter 1 and if you watch the lecture you will find that it is an overview from the textbook.


  1. Mortgage Intelligence is here to help you get an attractive mortgage rate on a new house. We have the finest mortgage brokers with a lot of expertise and too many lenders who promise the best mortgage rate as well. Please contact one of our agents if you or someone you know wants to purchase a new home in Oshawa. You should check our website for information regarding our agents.Mortgage rate Oshawa

  2. I read the above article and got some knowledge from your article which is about finance. It's actually great and useful data for us. Thanks for sharing it.
    business term loan

  3. Hi dear,

    Thank you for this wonderful post. It is very informative and useful. I would like to share something here too. If you are looking for Finacia adviser or a chartered accountant Bexley United Kingdom. Then you sholud Relax Tax Limited for the job. They will assist you with the best plan for your money and will provide you service in very cheap and affordable price. please do visit the website mentioned in the comment below.

    Chartered accountant in Sidcup

  4. The role of finance in business is also to make sure there are enough funds to operate and that you're spending and investing wisely. The importance of business finance lies in its capacity to keep a business operating smoothly without running out of cash while also securing funds for longer-term investments. Express Finance

  5. Working with a financial advisor is a crucial part of the legacy planning process. For more information on what strategies will help you to get the most out of your legacy, feel free to contact lugenfamilyoffice.


  6. Really nice post about the financial planing and how financial advisors help small business to manage their business tax.

    SRB Capital, LLC

  7. Hey what a brilliant post I have come across and believe me I have been searching out for this similar kind of post for past a week and hardly came across this. Thank you very much and will look for more postings from you Best forex scam recovery service provider.

  8. I just need to say this is a well-informed article which you have shared here about hoodies. It is an engaging and gainful article for us. Continue imparting this sort of info, Thanks to you.investment management

  9. Hi Dear,

    I wanted to thank you for this great Information and knowledge, I definitely loved every little bit of it. I have you bookmarked your web site to check out the latest stuff you post. Your blog is eye-catching. I get pleasure from it. Thanks for sharing this beautiful piece of writing.We offer you short, medium and long-term assessments and forecasts for the most important global financial markets. Stock market newsletter and investment advisor. Please do visit the site for more further details.

    stock newsletter

  10. I really like the work which you have done by posting such an interesting post about smartphone case. I got some useful knowledge from this post. Keep Posting. Best Solution For Debt

  11. Great article by the great author, it is very massive and informative but still preaches the way to sounds like that it has some beautiful thoughts described so I really appreciate this article. Best scammed by online trading service provider.

  12. You have done a good job by publishing this article. I appreciate your efforts which you have put into this article, It is a beneficial article for us. Thanks for sharing such informative thoughts. financial advisor fiduciary

  13. After a long time, I read a very beautiful and very important article that I enjoyed reading. I have found that this article has many important points, I sincerely thank the admin of this website for sharing it. Best bank guarantees for sale service provider.

  14. I found decent information in your article. I am impressed with how nicely you described this subject, It is a gainful article for us. Thanks for share it. best bitcoin trading platform usa

  15. After a long time, I read a very beautiful and very important article that I enjoyed reading. I have found that this article has many important points, I sincerely thank the admin of this website for sharing it. Best lost money recovery services service provider.

  16. If you'll take those elements into consideration, you must now no longer have troubles gaining access to the loans.Alternative Funding

  17. The article was up to the point and described the information about education and learning. Thanks to blog author for wonderful and informative post. Broker Agent Advisor

  18. It's very nice of you to share your knowledge through posts. I love to read stories about your experiences. They're very useful and interesting. I am excited to read the next posts. I'm so grateful for all that you've done. Keep plugging. Many viewers like me fancy your writing. Thank you for sharing precious information with us. Best antminer l7 service provider.

  19. Great article by the great author, it is very massive and informative but still preaches the way to sounds like that it has some beautiful thoughts described so I really appreciate this article. Best digital crypto exchange service provider

  20. I am impressed. I don't think Ive met anyone who knows as much about this subject as you do. You are truly well informed and very intelligent. You wrote something that people could understand and made the subject intriguing for everyone. Really, great blog you have got here. Finance management plans

  21. You have done good work by publishing this article here. I found this article too much informative, Bitcoin atm vancouver and also it is beneficial to enhance our knowledge. Grateful to you for sharing an article like this.

  22. Exact information, this information is excellent, informative and very important for everyone. Secure Bitcoin Trading Platform Online


  23. I will share it with my other friends as the information is really very useful. Keep sharing your excellent work about CREDIT CARD GENERATOR namso v5.

  24. You have shared a lot of information in this article about security investment bank. I would like to express my gratitude to everyone who contributed to this useful article. Keep posting.


  25. It’s great to come across a blog every once in a while that isn’t the same out of date rehashed material. Fantastic read.Finance Recovery

  26. You are providing good knowledge. It is really helpful and factual information for us and everyone to increase knowledge. about Financial Advisor Website Optimize .Continue sharing your data. Thank you.

  27. Hello, Wow every one of the posts are exceptionally educational for individuals who visit this site. Great work! We additionally have a Website. Kindly go ahead and visit our site. Much thanks to you for sharing. plr digital products

  28. The information in the post you posted here is useful because it contains some of the best information available. Thanks for sharing it. Keep up the good work best forex cashback.

  29. Thanks for sharing the best information and suggestions, it is very nice and very useful to us. I appreciate the work that you have shared in this post. Keep sharing these types of articles here.Cash Loans Online site.

  30. Thanks for sharing the best information and suggestions, it is very nice and very useful to us. I appreciate the work that you have shared in this post. Keep sharing these types of articles here.Credit Consultant in Usa site.

  31. I generally check this kind of article and I found your article which is related to my interest.Security Banking Online Genuinely it is good and instructive information. Thankful to you for sharing an article like this.


Post a Comment