Lecture Notes: Setting Up the Class and Business Objectives

Sound Issue Resolution

• New receivers in classrooms were picking up sound from other classrooms.
• Issue to be resolved by the school.

Class Setup Overview

• Discuss quizzes, projects, and business endgame.
• Focus on what businesses aim to achieve.

Corporate Finance Principles

• Investment Principle: Take projects with returns > hurdle rate.
  • Hurdle rate based on investment risk and debt-equity mix.
  • Returns should focus on cash flows over earnings.
• Financing Principle: Determine optimal debt-equity mix.
  • Minimize hurdle rate, maximize value.
  • Match debt type to company assets.
• Dividend Principle: Return cash if investments don't meet hurdle rate.

Story of Steady Safe

• Indonesian taxi company borrowed dollars instead of rupiah.
• Devaluation led to bankruptcy due to currency mismatch.
• Lesson: Align debt with asset currency.

First Principles and Their Violations

• Some think they're exempt from principles (e.g., high-profile finance professionals).
• 2008 financial crisis as an example of violating principles.

Class Structure

• First sessions: No numbers, focus on endgame.
• Middle sessions: Discuss risk, return, cash flows.
• Later sessions: Discuss debt-equity mix and dividend principles.
• Final sessions: Linking decisions to business value.

Example Companies for Lab Experiments

• Disney: Entertainment, well-known.
• Vale: Brazilian mining, new vs. old economy.
• Tata Motors: Indian auto, family group dynamics.
• Baidu: Chinese tech, search engine.
• Deutsche Bank: Banking regulations.
• Bookscape: Small private business, real-world decisions.

Course Project

• Group work: Pick companies with thematic connections.
• Focus on diversity (foreign, small, large companies).

Grading and Quizzes

• Project: 40% of grade, group-based.
• Three quizzes, open book.
• Policy on missed quizzes: Reweighting rather than penalty.

Endgame for a Business

• Businesses start to fulfill market needs and aim for profit.
• Debate on business objectives: Profit vs. sustainability and stakeholder wealth.

Stakeholder Theory

• Stakeholders include shareholders, lenders, employees, customers, and society.
• Shareholders hold residual claims, hence given priority.

Maximizing Stock Prices

• Issues with focusing solely on stock prices.
• Potential for stakeholder harm if corporate control is abused.

Corporate Governance Challenges

• Board of directors often ineffective due to lack of independence or incentivization.
• Example: Disney's 1997 board was "rubber-stamp," dominated by insiders.

Importance of Clear Objectives

• Need for a singular focus to optimize resources and decision-making.
• Stock prices chosen for objective due to constant updating and observability.

Conclusion and Next Steps

• Real-world impact of principles and governance issues.
• Future classes to explore these dynamics further.