Prof.&Irene&Comeig&–&Financial&Management,&GIB&
2015/16&
1
Unit 1. Corporate Financial Management
1.1. What is Corporate Finance?
1.2. Assets and liabilities structure: financial equilibrium
1.3. The goal of Financial Management
Basic bibliography:
ROSS, S; WESTERFIELD, R; JAFE, J. (2010): Chapters 1.1, 1.4., 2.1
and Brealey, R.A., Myers S.C., Allen, F. (2008), Mc Graw Hill
1.1 What is Corporate Finance?
To carry on business, corporations need an almost endless variety of real assets. Many
of these assets are tangible, such as machinery, factories, and offices; others are
intangible, such as technical expertise, trademarks and patents. All of them need to be
paid for.
To obtain the necessary money, the corporation sells claims on its real assets and on the
cash those assets will generate. These claims are called financial assets or securities.
For example, if the company borrows money from the bank, the bank gets a written
promise that the money will be repaid with interest. Thus the bank trades cash for a
financial asset (the “written promise”). Financial assets include not only bank loans but
also shares of stock, bonds, and a dizzying variety of specialized securities.
Corporate financial management faces two basic questions:
First, what real assets should the firm invest in?
Second, how should the cash for the investment be raised?
The answer to the first question is the firm’s investment, or capital budgeting,
decision.
The answer to the second question is the firm’s financing decision.
When an investment opportunity or “project” is identified, the financial manager first
asks whether the project is worth more than the capital required to undertake it. If the
answer is yes, he or she then considers how the project should be financed.
Financial managers look to financial markets as a source of information about interest
rates, raw material prices, and market values of firms and securities. Financial managers
are interested in market values.
