Slides Finance Brealey Myers Principles Of

5503 words, 23 pages

Intro Sample...

Principles of Corporate Finance
Brealey and Myers
Sixth Edition

Finance and the Financial Manager

Chapter 1

Topics Covered
w What Is A Corporation? w The Role of The Financial Manager w Who Is The Financial Manager? w Separation of Ownership and Management w Financial Markets


Corporate Structure
Sole Proprietorships Unlimited Liability Personal tax on profits Partnerships

Limited Liability Corporations Corporate tax on profits + Personal tax on dividends


Role of The Financial Manager
(2) (1)

Firm's operations

Financial manager


Financial markets

(1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned... View More »

Body Sample...

12 PV of C1 = $400 at 7% 400 PV = = 374 1 + .07


Rate of Return Rule
w Accept investments that offer rates of return in excess of their opportunity cost of capital.
Example In the project listed below, the foregone investment opportunity is 12%. Should we do the project?
profit 400,000 ? 350,000 Return = = = .14 or 14% investment 350,000


Net Present Value Rule
w Accept investments that have positive net present value.
Example Suppose we can invest $50 today and receive $60 in one year. Should we accept the project given a 10% expected return?

60 NPV = -50 + = $4.55 1.10


Opportunity Cost of Capital
Example You may invest $100,000 today. Depending on the state of the economy, you may get one of three possible cash payoffs:

Economy Payoff




$80,000 110,000 140,000

80,000 + 100,000 + 140,000 Expected payoff = C1 = = $110,000 3


Opportunity Cost of Capital
Example - continued The stock is trading for $95.65. Depending on the state of the economy, the value of the stock at the end of the year is one of three possibilities:

Economy Stock Pric e

Slump $80

Normal 110

Boom 140


Opportunity Cost of Capital
Example - continued The stocks expected payoff leads to an expected return.
80 + 100 + 140 Expected payoff = C1 = = $110 3 expected profit 110 ? 95.65 Expected return = = = .15 or 15% investment 95.65


Opportunity Cost of Capital
Example - continued Discounting the expected payoff at the expected return leads to the PV of the project.

110,000 PV = = $95,650 ...

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