Corporate Issuers covers corporate governance, capital budgeting decisions, cost of capital, capital structure, and working capital management. Understanding how firms make investment and financing decisions is central to this topic.
Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Key elements include the board of directors (independent vs. insider directors), shareholder rights, management compensation, and stakeholder management. Good governance aligns the interests of management with shareholders and reduces agency costs — the costs arising from conflicts of interest between principals (shareholders) and agents (managers).
Capital budgeting is the process of evaluating long-term investment projects. The primary methods are: NPV (Net Present Value) — accept if NPV > 0; IRR (Internal Rate of Return) — accept if IRR > cost of capital; Payback Period — time to recover initial investment. NPV is the theoretically preferred method because it directly measures value creation. When NPV and IRR conflict (for mutually exclusive projects), NPV should be used.
The weighted average cost of capital (WACC) represents the minimum return a company must earn on its investments. It is calculated as the weighted average of the after-tax cost of debt and the cost of equity. The cost of equity can be estimated using the CAPM (Capital Asset Pricing Model) or the dividend discount model. The cost of debt is the yield on new debt issuance, adjusted for the tax shield.
Capital structure refers to the mix of debt and equity used to finance a firm. Modigliani-Miller (MM) without taxes: capital structure is irrelevant to firm value. MM with taxes: debt increases firm value through the tax shield (interest is tax-deductible). In practice, firms balance the tax benefits of debt against the costs of financial distress. The optimal capital structure minimizes WACC and maximizes firm value.
Working capital management involves managing current assets and current liabilities to ensure the firm has sufficient liquidity. The cash conversion cycle = Days of Inventory + Days of Receivables - Days of Payables. A shorter cycle means the firm converts inventory to cash more quickly. Effective management balances the costs of holding too much working capital (opportunity cost) against too little (liquidity risk).
Sum of discounted cash flows minus initial cost. Accept if NPV > 0.
Weighted average of equity cost and after-tax debt cost.
Expected return on equity based on systematic risk (beta).
Days of Inventory on Hand + Days Sales Outstanding - Days Payable Outstanding.
Measures sensitivity of operating income to changes in sales.
A systematic process for evaluating long-term investment projects.
Weighted Average Cost of Capital represents the firm's overall cost of financing.