FIN 6215 CORPORATE FINANCIAL MANAGEMENT
CLASS #1 LEARNING ACTIVITIES
For Class #1, please participate and complete the following learning activities. (1) Study Guide to Class #1
Class #1 learning materials are available at Blackboard. Learning and study guidelines are provided below:
(1.1) -The main objective of Class #1 lecture is to learn the fundamental concepts of corporate financial management. Please review the PowerPoint presentation of Class #1. (1.2) - Important concepts to cover: fundamentals of corporate finance, theory of the firm, the value of the firm, corporate financial system, objectives of corporate financial management, and most importantly, capital market imperfections and the M-M theorem. (1.3) - PowerPoint slides to read and review:
Here are the step-by-step information on reviewing and learning the most important concepts/tools in Class #1; these are also important corporate finance concepts and tools that
Step (1): Start with understanding the concepts of corporate financial management. Understand the five important questions in corporate finance (see Slide #14): make sure you can answer these questions after reviewing Class #1 materials.
Step (2): Corporate Financial System (IMPORTANT CONCEPT) Understand the corporate financial system, including the main players and their economic interactions in the corporate financial system. Understand the interrelationships between the firm and the capital markets - e.g. what firms provide to the financial markets; and what financial markets provide to the firms. Most importantly, understand the presence (and importance) of different types of market imperfections existed in the corporate financial system. Examples of capital market imperfections include: information asymmetry, agency cost, financial distress, tax, market inefficiency, transaction costs, among others.
Step (3): Theory of the Firm (IMPORTANT CONCEPT) - Try to understand two prominent concepts/frameworks here - and (i) firms as "Nexus of Incomplete Contracts"; and (ii) the “Balance Sheet Model of the Firm” (which highlights the relation between firm life cycle and financial management); note that we can also use the Balance Sheet Model to understand how different parts of corporate financial management play role in the firms. Furthermore, review the important concepts below (these concepts will be covered and explained in our lecture):
o Firm-Cycle and Corporate Financial Management (IMPORTANT
CONCEPT): Try to understand how different types of market
imperfections play role in different stages of the firm life-cycle. For example: startup firms face high information asymmetry; as such, VC financing is appropriate as it can overcome information asymmetry. Another example: agency problems can be severe for mature and declining firms. Review Slide #19.
o The Balance-Sheet Model of the Firm and Staged Financing
(IMPORTANT CONCEPT): Try to understand firms with two
frameworks here - and (i) firms as "Nexus of Incomplete Contracts"; and (ii) the “Balance Sheet Model of the Firm”; we can also use the Balance Sheet Model to understand how different parts of corporate financial management play role in the firms. Review Slides #22 - #24. Step (4): Important concepts of Information Asymmetry and Agency Problems (examples of “Capital Market Imperfections”). Please review these important concepts and understand how imperfect information and agency costs are severe in modern corporations. Try to find some real examples that are related to these capital market imperfections.
Step (5): Introduction to Corporate Financing Decision - Understand the concept of external financing and different financing methods. Understand Capital Structure as a "PIE" and the major differences between equity and debts (as “contingent claims” of firm value): e.g. debt has constant stream of cash flows (in form of interest payments),...
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