Introduction to Corporate Finance

Welcome to Module One. We'll begin with a description of corporate finance, its core principles (such as compensation for risk) and the five basic corporate finance functions (financing, capital budgeting, financial management, corporate governance, and risk management). Then we'll briefly review the legal forms of business organization, placing greatest emphasis on the competitive advantages and characteristics of corporations. We'll discuss the goals of the corporate financial manager and the related issues of agency costs ethics.

We'll continue in the module by providing a broad overview of the most important source of accounting information: a firm's financial statements. The focus is not on how accountants construct these statements but rather on why these statements are important to financial managers. Then, we'll describe why and how finance places primary emphasis on measures of cash flow rather than on financial-statement-based measures of earnings, such as net income or earnings per share. We'll demonstrate how companies use the information from financial statements to calculate various ratios to analyze financial performance over time or to benchmark their results against those achieved by other firms.

In the final part of the module we'll introduce one of the most fundamental concepts in finance: the time value of money. Simply put, time value of money means that a dollar today is worth more than a dollar in the future. Because most business decisions involve costs and benefits spread out over many months or years, financial managers routinely apply time value of money techniques in decision making. Finally, we describe and demonstrate the time value of money techniques commonly used by financial managers to make valid cost/benefit comparisons when cash flows occur at different times.