1st

• Demographic shifts gradually kicking in

• Recruitment challenges?

• The role of private and public sector?

• Investments in technology?

• Alternative ways of financing the sector?

• This debate will likely grow stronger

• Investment decision?

  • what real assets to buy?

  • Rule of thumb: investment decision important for the upside: how high can you fly?

• Financing decision?

  • how to pay for those real assets?

  • Rule of thumb: Financing decision on the downside: how deep can you sink before drowning?

• separate legal identity

• differs with country and regulations, but in generel: limited liability

• Unlike sole proprietoship or partnerships: personal liability (partnerships typically liable together; bank can go after personal belongings)

• What are consequences?

  • cost of capital (- generally higher)

  • risk profile

1) Cash raised by selling financial assets to investors. (get money from market e.g. bank, equity, bonds)

2) Cash invested in the firm’s operations and used to purchase real assets (in line with strategy, real assets generste income (tang. + intang.)

3) Cash generated by the firm’s operations (money in terms of profits)

4) a. Cash reinvested (in business); b. Cash returned to investors.

• Company management is complex, so many interests from stakeholders, shareholders, employees etc.

• But, the main task of the manager is to reach the goal determined by the owners

• In practice, often, but not always: maximize shareholder value

• Why? When? (maximize shareholder value) - owner responsibility

• Assumption: well-functioning financial markets

• Allows different timing- and risk preferences to sort perfectly

Shareholder wants:

1. To maximize their net value

2. Manage timing of consumption freely (e.g. spend now by borrowing or investing to spend later)

3. Manage risk of their investment freely

   1. the financial market solves (2) and (3), but (1) is where financial managers can help

—> Fisher’s separation theorem: a financial manager’s decision can be separated from shareholder preferences —> focus on max. exp. returns

• Why do some investments increase market value, while others reduce it?

• Trade-off: Finance project (internal) or pay out the cash?

• It projects financed have a higher rate of return than the opportunity cost of capital - share prices are likely to increase or stay strong

• The opportunity cost of capital: minimum rate of return on a project or investment required by an investor - relative, determined by returns in the financial markets

• The opportunity cost will depend on the risk of the investment project

  • safe dollar is more valuable than a risky dollar

  • “… at the same level of risk”

• typically a separation of ownership and control in large corporations

• Owners hire managers to develop their asset

• shareholders are principals, managers are agents acting on behalf of the principals

• BUT: Do managers maximize shareholder wealth or manager wealth?

  • how to ensure manager’s heart is close to the owner’s pocket?

  • —> Shares!

  • Principal agent theory as a large field of study

Agency cost:

Occurs when managers do not attempt to maximize values, and shareholders incur costs of monitoring the manageres