Session 1: Corporate Finance: What is it?

Introduction to Corporate Finance

In this introductory session, the speaker lays out his vision for what corporate finance is all about. He talks about the first principles that drive every corporate financial decision and sets up some broad themes for the class.

What is Corporate Finance?

• Corporate finance covers any decision that involves the use of money.

• The speaker's three objectives over this 36-session course are to give tools, techniques, methods, and models of modern corporate finance; to give a big picture of corporate finance and show where these tools fit and how they work together; and to make corporate finance fun.

• The speaker introduces a financial balance sheet as a forward-looking tool in contrast to an accounting balance sheet which is backward-looking.

Accounting Balance Sheet vs Financial Balance Sheet

• An accounting balance sheet has assets such as current assets, fixed assets, financial assets, intangible assets, and liabilities such as current liabilities, long-term liabilities, shareholders' equity.

• A financial balance sheet is simpler than an accounting balance sheet but more forward-looking. It includes operating assets (investments in working capital), non-operating assets (investments in other companies), financing debt (short-term debt plus long-term debt), and equity.

Conclusion

Corporate finance covers any decision that involves the use of money. The speaker's three objectives over this 36-session course are to give tools, techniques, methods, and models of modern corporate finance; to give a big picture of corporate finance and show where these tools fit and how they work together; and to make corporate finance fun. A financial balance sheet is introduced as a forward-looking tool in contrast to an accounting balance sheet which is backward-looking.

Assets and Principles of Corporate Finance

In this section, the speaker introduces the two categories of assets on a balance sheet: assets in place and growth assets. They also discuss the two ways to fund a business: debt and equity. The three basic principles that govern corporate finance are introduced as well.

Categories of Assets

• There are two categories of assets on a balance sheet: assets in place and growth assets.

• Growth assets are investments that are expected to generate value in the future.

• Tangible or intangible distinctions do not matter much in finance.

Funding a Business

• There are only two ways to fund a business: borrowing money (debt) or using your own money (equity).

• Debt holders get paid first, have little management control, and have first claim on company assets if it goes bankrupt.

• Equity investors run the company but have residual claim on what is left over after debt holders get paid.

Basic Principles of Corporate Finance

• The investment principle states that investments should earn a return greater than the minimum acceptable hurdle rate.

• The financing principle says to find a mix of debt and equity that maximizes business value or minimizes hurdle rate.

• The dividend principle says to take cash out of the business if you cannot find investments that make your hurdle rate.

Corporate Finance: First Principles

In this section, the speaker introduces the first principles of corporate finance and establishes four themes that will be discussed throughout the course.

Common Sense and Focus

• Use common sense when evaluating financial models.

• The singular objective in corporate finance is to maximize the value of a business.

Business Life Cycles

• Businesses go through life cycles, just like individuals do.

• A company's position on its life cycle determines what kind of decisions it should make regarding investments, financing, and dividends.

Growth vs. Mature Companies

• Growth companies should primarily fund their investment decisions with equity.

• Mature companies can afford to pay out more in dividends and borrow more money.

Universality of Corporate Finance

• Corporate finance principles apply universally, not just to publicly traded corporations.

Corporate Finance Principles

The speaker emphasizes the importance of corporate finance principles and how they are unchangeable across continents, markets, and types of businesses. He warns that violating first principles can be incredibly costly.

• Violating corporate finance principles is not a matter of if you will pay a price, but when.

• Establishing first principles is crucial to avoiding costly mistakes in corporate finance decisions.

Approach to Corporate Finance

The speaker describes his approach to teaching corporate finance as an applied class. He will use six companies from different industries and markets to illustrate key principles.

• The class will focus on applying theories and models to real companies.

• Six companies will be used throughout the course to illustrate key principles in corporate finance.

• Companies include Disney, Vale, Tata Motors, Baidu, Goodyear Tire & Rubber Company, and Book Scape.

Course Roadmap

The speaker outlines the structure of the course and what topics will be covered in each section.

Investment Principle

• Hurdle rates will be discussed along with measuring returns.

Financing Principle

• Finding the right mix of debt and equity for a company will be explored along with tools for determining this mix.

• Determining the right kind of debt for a company will also be discussed.

Dividend Principle

• This principle focuses on determining dividends at the end of the class.

Overall, this course aims to establish first principles in corporate finance through practical application using real-world examples.