Finanzwirtschaft / Corporate Finance

•Process of planning and managing a firm’s (long-term) investments
•Real assets: capital budgeting / capital expenditure
•Tangible vs. intangible assets
•Long term vs. short

•Financial assets
•Raising money for investments and operations
•Capital structure: equity vs. debt
•Long term vs. short term --> Capital vs. money market
•Foreign exchange (FX market)

•Management of day-to-day finances
•Working capital: a firm’s short term assets and liabilities
•Objective: to ensure that firm has enough resources (cash and inventory) to continue its operations

Ordinary partnership (OHG)

Limited partnership (KG)

Corporation / Public company (AG)

Limited liability corporation (GmbH)

Chief Financial Officer is deeply involved in financial policy and financial planning and is constant contact with the chief executive officer (CEO) and other top management.

Key: (1) Cash raised by selling financial assets to investors; (2) cash invested in the firm´s operations; (3) cash generated by the firm´s operations; (4a) cash reinvested; (4b) cash returned to investors.

From a shareholders’ point of view: what is a good financial management decision? What should be the goal of a corporation?
•Profitability?
•Maximize profit?
•Minimize costs?
•Safety / risk management? Avoid financial distress and bankruptcy?
•Other goals?:
•Liquidity?
•Maximize market share?
•Maximize the current value of the company’s stock?
•Independency?

The firm can either keep and reinvest cash or return it to investors. (Arrows represent possible cash flows or trransfers.) If cash is reinvested, the opportunity cost is the expected rate of return that shareholders coukd have in obtained by investing in financial assets.

minimum acceptable rate of return on capital investment, depentds on the alternative investment opportunities avaliable to investors in financial markets. 

is the value of the action that you do not choose, when choosing between two possible options: If we do take on the project, we need to think about the opportunity costs involved. The opportunity cost of studying at university for three years is the three years of pay that you do not earn during that time.

Reputation is particularly important in finance.

Als Manager vergisst man die moralische Normen und verhaltet unethisch. Pro/Contra:

• 1 Sicherung Familienseinkommen/ Imagverluste, nicht Profit zählt handeln

• 2 Imegegewinn durch Profitsteigerung/ Negatives einfluss auf externe effekte

• 3 Verantwortung ggü. shareholdern, größerer handelungsspielraum/Flexibilität/ Verantwortung ggü. shareholdern (image, langfr. Geldverlust)

• 4 der masse ist die produktion egal! / ethisch vertretbares Handeln schafft Vertrauen --- konstante

• 5 Bei Existenzangst ist ethisches Verhalten egal!/ Soziale verantwortung (Stakeholdeer)

• 6 Ethisches Verhalten ist teuer/ Vermeidung von Strafen

• 7 Niedrigere Löhne sparen Geld/ entwicklung der Schwellenländer behindert

• 8 Man schafft Arbeitsplätze in Schwellenländern/ Mitarbeiterbindung durch CRS

• 9 Förderung Infrastruktur in Schwellenländern/Entwicklung/ Weniger Arbeitsplätze im Herkunftsland

• 10 Kundenverlust an unethisch handelnde Konkurenz/ Nachhaltigkeit

•Agency relationship and problems
•Possibility of conflict of interest between the firm’s owners (principal) and managers (agents)
•Managers, acting as agents for stockholders, may act in their own interests rather than maximizing value

Arrangments:

• Legal and Regulatory Requirements (SEC)
• Board of Directors
• Blockholders
• Specialists Monitoring
• Compensational Plans
• Takeovers
• Shareholder Pressure

• Procedures and processes according to which an organization is directed and controlled.
• The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making.

Financial statement that show the value of the firm’s assets and liabilities at a particular point in time (from an accounting perspective)

Working capital (= net current assets) =  Current assets   -  Current liabilities

• Value of assets or liabilities according to the balance sheet (backward-looking)
• E.g. book value of a fixed assets (e.g. a machine): historical costs adjusted for depreciation (see § 253 para. 1 HGB)

1. A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, market capitalization is higher than book value for most companies. Since book value is a more accurate measure of valuation for companies which aren't growing quickly, book value is of more interest to value investors than growth investors.

2. The value of an asset as it appears on a balance sheet, equal to cost minus accumulated depreciation.

• Current values of assets and liabilities (forward-looking)
• Are usually different from book value

•The difference between the market values of assets and liabilities = market value of the shareholders’ equity.

What investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the current market price of a firm's shares.

Financial statement that shows the revenues, expenses, and net income of a company over a period of time (from an accounting perspective).

Financial statement that shows the firm’s cash receipts and cash payments over a period of time.

Differenz  zwischen Geldfluss und Gewinn

Cash provided by operations (Cash aus betrieblichen Tätigkeit. War negativ oder positiv. Wenn negativ - Verluste, handle ich falsch. Soll positiv sein.) +

Cash flows from investments (Cash Fluss aus Investments Tätigkeit. Sollte negativ sein,
Wenn positiv - wir haben mehr Maschinen gekauft als verkauf) +

Cash provided by (used for) financing activities (Cash provided by (used for) financing activities)

= Net increase (decrease) in cash and cash equivalents (

Für die investoren
- gibt es auskuft ob das unternehmen wäschst (ja wenn wir geld verdienen), interessant für die langfristige Investition,
- Dividenden

Rückstellungen, lieferantenschulden)

Cash provided by operations =
Net income (profit & loss statement)
+ Depreciation
+ Changes in net working capital:

+ Decrease / - increase in accounts receivable
+ Decrease / - increase in inventories
+ Decrease / - increase in other current assets
+ Increase / - decrease in accounts payable
+ Increase / - decrease in other current liabilities

Cash flows from investments =
Cash provided by disposals of property, plants and equipment or sales of other investments
./. Cash used for investments in property, plants and equipment and other investments or acquisitions

Cash flows from financing activities =

Cash provided by financing activities, e.g. issues of stocks or debt
./. Cash used for financing activities, e.g.
reduction in short-term and
long-term debt,
dividend payments or
other payments

• Taxation has a considerable influence on decisions concerning the extent and form of financing a company’s activities due to different tax treatments of financing alternatives
• Financing decisions are also a central research object of corporate finance research

-- will be discussed in more detail in chapter 16

• Cookie-jar reserves
• Off-balance sheet assets and liabilities
• Revenue recognition
• Mark-to-market accounting

• Corporate tax (Körperschaftsteuer): 15% plus solidarity charge (= 16.875%)
• Trade tax (Gewerbesteuer): depends on municipality (Rheinbach: about 15.3%)
• In general, interest rates are tax deductible (= expenses)
• Dividend payments are not tax deductible (paid out of after-tax income)
• Loss carry back and loss carry forward