Copporate Finance: Chapter - 1

Capital budgeting: the process of making and managing expenditures on long lived assets. What long-term investments should the firm take.

Capital Structure: represents the proportions of the firm's financing from current and long term debt and equity. It answers: where will the firm get the long term financing to pay for its investments. What mixture of debt and equity should it use to fund operations.

Working capital management: How should the firm manage its everyday financial activities?


Net working capital: current assets - current liabilities

Goals of Financial Management:
- survive
- beat the competition
-avoid financial distress and bankrupcy
- maximize sales and market share
- minimize cost
- maximize profits
- maintain steady earnings growth.

Role of a Financial Manager: Financial manager acts on behalf of shareholders and makes best decisions that increase the value of the stock. His/her goal is to maximize the current value per share of the existing stock.

Corporate Finance: the study of the relationship between business decisions, cash flows, and the value of the stock in the business.

Agency Relationship: Relationship between stockholders and management.

Agency Problem: In all agency relationships there is a possibility of a conflict of interest between the principle stockholders and the agent (management).

Agency Cost: The costs that are incurrent by a business due to a conflict of interest between stockhelders and management.