Lecture Notes on Corporate Finance Principles

Introduction

• The school installed new receivers causing sound interference.
• Discussion on final elements of class setup.
• Focus on quizzes, project, and the end goal for business.

Business End Game

• Unclear goal in business over the past 20 years.
• First principles in corporate finance discussed:
  • Investment Principle: Take projects that earn a return above the hurdle rate.
  • Financing Principle: Balance of debt and equity to minimize the hurdle rate.
  • Dividend Principle: Return cash to owners if hurdle rate investments aren't found.
• Common mistakes by "special" people in finance, e.g., SteadySafe's wrong currency borrowing.

Class Structure

• Sessions will cover different aspects:
  • End Game: 3 sessions, no numbers.
  • Investment Principle: Next 10 sessions.
  • Financing Principle: Sessions 16-19.
  • Dividends & Cash Balance: Sessions 20-23.
  • Value Estimation: Final sessions.
• Real-world applications using companies like Disney, Vale, Tata Motors, Baidu, Deutsche Bank, and Bookscape.

Class Project

• Form groups with a theme (e.g., travel, technology).
• First step: find a group, then pick companies.
• Project grades based on group effort.

Grading and Quizzes

• Grades: 25-35% A's, 50-55% B's, 10% C's.
• Project: 40% of grade.
• Quizzes: Three, worth 10% each.
• Final exam on May 13.
• Quiz policy allows for one quiz score replacement.

Business Objectives and Stakeholders

• Traditional objective: maximize shareholder wealth.
• Pushback for broader goals (sustainability, stakeholder wealth, ESG).
• Necessity of having a primary objective to avoid confusion.
• Maximizing stock prices is practical due to constant updates.

Corporate Governance

• Utopian corporate finance world assumptions:
  • Shareholders have power over managers.
  • Lenders are protected.
  • Firms communicate honestly with markets.
  • No social costs.
• Real-world issues and agency problems:
  • Weak annual meetings and ineffective boards.
  • Stockholders have limited power over managers.
  • Lenders can be exploited without protection.
  • Markets can be irrational.
  • Social costs exist.
• Example of poor corporate governance: Disney in 1997.
  • Large board, insiders, conflicts of interest.

Conclusion

• Emphasis on first principles in corporate finance.
• Open discussion on deviations from these principles.
• Preparing for potential future financial crises.