The Framework of Finance Joint MBA 2014 FINC 5000/5880.

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The Framework of Finance

Joint MBA 2014FINC 5000/5880

What is Finance?

• Finance is: “Any decision in a business/organization that involves Money…”

• “Everything else you do in this MBA program is in favor of Finance”

The Objective in Finance:

“if you don’t know where you are going,

it does not matter how you get there”

(Alice in Wonderland)

Fundamental Principal of Finance

Investment Decision Financing

Decision

Pay Out Decision

Invest in Assets with Return> Hurdle Rate

Find the right kind of debt and the right relation Debt/equity

If you don’t have enough Investments that have a return>hurdle rate; return the cash to the owners

Objective Function (theory)

Debt HoldersSociety

Stock Holders

Financial Markets

MANAGERS

No Social Costs

Costs can be traced to the firm

Lend Money

Protect Debt Holder interests

What is the reality?

Debt HoldersSociety

Stock Holders

Financial Markets

MANAGERS

Significant Social Costs

Some costs can not be traced to the firm

Lend Money

Debt holders can get ripped off…

So what do we see nowadays ?

Debt HoldersSociety

Stock Holders

Financial Markets

MANAGERS

Corporate Good Citizen constraints

More laws…

Lend Money

Protect themselves (covenants)

Maximize Firm Value

ASSETS (debit) LIABILITIES (credit)CORP. BALANCE SHEET date:………..

Google Inc.

Total Assets in Place: 58 B USD (31%)

Total Debt 0 B USD

Total Equity 188 B USD (100%)

Total Growth Assets: 130 B USD (69%)

Walt Disney Inc.

Total Debt 30 B USD (33%)

Total Equity 62 B USD(67%)

AT&T Inc.

Facebook (estimates)

Total Assets in Place: <1 B USD (2%)

Total Growth Assets: >49 B USD (98%)

Worst Board…2011Carli Fiorina bought Compaq….The Board fired her in 2005.

Mark Herd took over in 2006.The Board fired him in 2010 (Sexual Harassment)

The BoD appointed Leo Apotheker (who?)An executive of SAP.He announced HP will become another IBM and sell of it’s PC business.He acquired Autonomy (UK Software)Launched Web OS (pulled the plug 2 months later)Developed and market a HP tablet (and pulled the plug 3 months later)He is expected to be fired this year…

Loyal customers are doubting what is going on in HP and buying their hardware somewhere else…” HP is lost”…..

Apoth….who? “ he was the best candidate for the job out of a group of very unqualified candidates”Two thirds of the BoD members voted for him without even having met him!

Or is it Yahoo! ?• Refused a golden offer from Microsoft

($33 per share only 2 years ago)• Flip flopped CEO’s on it’s BoD• Ousted Carol Bartz as CEO• Who then opened up in Fortune (“Yahoo

is the worst BoD”)• And was suspended immediately…• Yahoo! holding back $ 10 Mln. severance

pay…. • THE directors of Yahoo! were “so

spooked by being cast as the worst board in the country” that they fired Carol Bartz as chief executive “to show that they’re not the doofuses that they are.”

Bartz never was the turnaround chief that the Yahoo board had wanted. Though she slashed costs and improved profit margins, she failed to improve revenue growth at a critical time when Yahoo has lost eyeballs and ad dollars to Google (GOOG) and Facebook. "They want revenue growth," says Bartz about the Yahoo board, "even though they were told that we would not have revenue growth until 2012."

Worst BoD 1997

In class assignment on your S&P500 CompanyCalpers (California) test of independent Boards

• Are a majority of the Directors outside directors?

• Is the Chairman of the BoD independent and not the CEO?

• Are the compensation and audit committees composed of entirely outsiders?

• Disney failed to score on any of these….

The Framework of Finance Joint MBA 2014 FINC 5000/5880.

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