Corporate Finance

• The Corporation:
• Public traded company> US frameworks> dominate the world
• Limited liability with double taxation> corporate tax and personal tax
• Australia has no double tax
• “C” normal, Apple, Tesla, large firms with double taxation
• “S” not public traded, not more than 100 shareholders in US> taxed only at shareholder level. Not subject to corporate taxes.
• Corporations> financially sophisticated
• Sole proprietorship> hairdresser
• Looking in numbers corporations low %
• Corporations high in % of revenue
• Total effective tax rate > total tax / earnings
• Cultural attitude is strong
• Pay to shareholders or make jobs a bit safer?

• Japan: all stakeholders> shareholders, investers (banks), employees, customers, society, government, etc. > Job security
• US: shareholders> no one else matters> pay dividends to shareholders
• NL: hard to tell.

• Separation between ownership and control.
• Sole: together
• Corporation: always separate. CEO spends money of everyone
• Board of director is legally in charge> appoints CEO. Real idea< CEO appoints the board and has the power.
• CFO> corporates, banks, commercial, accounting
• CEO> management experience, marketing, technology. Less formal training. Less educated. Job of CEO is to select the right investment projects.
• Conflict with CEO and shareholders> they want something else
• Agency costs>

• Compensation plans
• Board of directors > monitor and supervise CEO
• Takeovers> kick out managers
• Specialist monitoring > activists
• Auditors

• They work well but not always> Enron most admired employer but fraud
• Statistics:
• Financial markets> large amount of data
• Different impressions
• Return> holding period return
• Variance: dispersion
• Mean minus real return is demeaned return

Degree of freedom: we are estimating with a sample> when we divide N-1 because we lost degree of freedom, because we are estimating the mean, so theres a bias as we didn’t observe the mean.

Excel function: Var.P (population N) and Var.S (sample, used N-1)

N number of observations

Covariance: measure relatedness> how they move together. Joint distribution.

Very positive correlated

Accounting:

Main source for finance. Market data and accounting data. Accounting data needs to make sense.

Balance sheet: cash:

Bad news: credit sales

Good news: dividends, invested

Interest expenses subtracted before taxes. Interest expenses are tax deductible

Pepsi lower tax than 30%> transfer pricing, licensing

Law of one price: same price for same risk

Fair market value> discount same interest rate

Arbitrage is transaction in two different market with a riskless profit

Sell expensive, buy cheap

Compounding: shorter periods> increased compounding frequencies, higher amounts.

Stock and bond:

Annuity and perpetuities

Growing perpetuity: always grows, not updated

Forecasts of growth is hard to do

G gets close to cost of capital

Growth annuity: fixed number of periods

One long perpetuity and one short

Short: cancel first out> power 3 for period 4 (first to cancel out). Additional discounting because it starts in period 4

Annuity: long A – short B  

R2> economically> amount of variation is explained, rest is idiosyncratic risk.

Value stock: dividend discount model

Gordon growth model: price stock today> discount all future dividends.

Forecast cost of capital and forecast dividend (sticky over time)