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THE FOUNDATIONS:
Any decision that involves money is a corporate financial decision. (Everything that a business does)
Three fundamental principles: the investment, financing and dividend principles.
The Firm: Structural Set-up
Firm: any business
The firm’s investments are generally termed assets. Assets are categorized into fixed asset, which are long-lived, and current assets, which areshort-term.
The assets that the firm has already invested in are called assets in place.
Those assets that the firm is expected to invest in the future are called growth assets.
To finance these assets, the firm can raise money from two sources. It can raise funds from investors or financial institutions by promising investors a fixed claim (interest payments), with a limited or no role in therunning of the business. We categorize this type of financing to the debt.
Debt may take the form of bank loans and equity is the owner’s own money.
Assets:
Assets in place
Growth assets
Liabilities
Debt
Equity
First Principles
-The investment principle: determines where businesses invest their resources.
Invest in assets and projects that yield a return greater than the minimumacceptable hurdle rate. The hurdle rate should be higher for riskier projects and should reflet the financing mix used (owner’s funds-equity or borrowed money-debt). Returns should be measured on cash flows and timing.
-The financing principle: governs the mix of funding used to fund these investments.
Choose a financing mix that maximizes the value of the investments and match the financing to thenature of the assets.
-The dividend principle: is how much earnings should be reinvested back into the business and how much returned to the owners.
In publicly traded, the form of the return – dividends or stock buybacks, will depend on what stockholders prefer.

The objective of the firm
Objective: maximizing the value of the business.
Good decision: increases value Poor decision: reducesvalue
Other objectives: market share or profitability.
What stockholders do in their own self-interest is also in the best interest the firm.
The investment principle:
Firms have scarce resources that must be allocated among competing needs.
We define investment decisions those that create revenues and profits but also those that save money. (Inventory, credit to grant to customers)
Strategicdecisions: markets to enter and the acquisitions of other companies.
Hurdle rate: A hurdle rate is a minimum acceptable rate of return for investing resources in a new investment. Has to be set higher for riskier projects and has to reflect the financing mix used.
Mix of debt and equity and its implications for the minimum acceptable hurdle rate.
Before de hurdle rate, we turn our attention tomeasuring the returns on an investment.
The financing principle:
Every business is funded with a mix of borrowed money (debt) and owner’s funds (equity).
In trade firm: debt= bonds and equity=common stock.
In private business: debt=bank loans and equity=owner´s savings.
ATTENTION: 1. OPTIMAL FINANCING MIX 2.TYPE OF FINANCING (LONG-TERM OR SHORT-TERM)
Using a basic preposition that a firmwill minimize its risk from financing and maximize its capacity to use borrowed fund if it can match up the cash flow on the debt to the cash flows on the assets being financed = the perfect financing instrument.
The dividend principle:
Business that thrives reaches a stage in its life when the cash flows generated by exiting investments is greater than the funds needed to take on goodinvestments. (Return the excess cash to owners)
Private businesses: involve the owner withdrawing a portion of her funds from the business.
Publicly traded corporation: involve paying dividends or buying back stock
*Firms that not return cash to owners won accumulate cash balances that grow over time.
Corporate financial decisions, firm value, and equity value.
The value of a firm is the present...