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125-515: John Pierpont Morgan Sr. (April 17, 1837 – March 31, 1913) was an American financier and investment banker who dominated corporate finance on Wall Street throughout the Gilded Age and Progressive Era . As the head of the banking firm that ultimately became known as J.P. Morgan and Co. , he was a driving force behind the wave of industrial consolidations in the United States at the turn of

250-403: A stable or "smooth" dividend payout - as far as is reasonable given earnings prospects and sustainability - which will then positively impact share price; see Lintner model . Cash dividends may also allow management to convey (insider) information about corporate performance; and increasing a company's dividend payout may then predict (or lead to) favorable performance of the company's stock in

375-735: A "considerable sum" selling shares of the Atlantic Telegraph Company after the trans-Atlantic telegraph wire was laid. Despite this success, the firm's creditor, Brown Shipley , declined to expand Morgan's line of credit , stating the company was no better than a speculative trader in securities. In 1871, at the behest of J.S. Morgan, the Philadelphia financier Anthony Joseph Drexel became J. P.'s mentor. They formed Drexel Morgan & Co. This new merchant banking partnership, based in New York, served as an agent for European investment in

500-414: A "value- space "), where NPV is then a function of several variables . See also Stress testing . Using a related technique, analysts also run scenario based forecasts of NPV. Here, a scenario comprises a particular outcome for economy-wide, "global" factors ( demand for the product , exchange rates , commodity prices , etc.) as well as for company-specific factors ( unit costs , etc.). As an example,

625-426: A bill for $ 58,175 before he delivered the remaining rifles that were being held as collateral. Reviewing the evidence, Charles Morris also concluded that it was "implausible" that Morgan did not know about the source of his profits. On October 1, 1864, George Peabody retired completely from the rechristened J. S. Morgan & Co. and agreed to reinvest his share of the partnership with the firm. In an effort to expand

750-417: A change in that factor is then observed, and is calculated as a "slope": ΔNPV / Δfactor. For example, the analyst will determine NPV at various growth rates in annual revenue as specified (usually at set increments, e.g. -10%, -5%, 0%, 5%...), and then determine the sensitivity using this formula. Often, several variables may be of interest, and their various combinations produce a "value- surface " (or even

875-423: A financier, he actively managed and reorganized the railroad corporations, increasing efficiency and acting as an early pioneer in the practice of private equity investing , a process that became known as "Morganization." In 1883, Morgan successfully marketed a large part of William H. Vanderbilt 's New York Central holdings. In 1885, he reorganized the New York, West Shore & Buffalo Railroad and leased it to

1000-514: A higher tax rate as compared, e.g., to capital gains ; see dividend tax and Retained earnings § Tax implications . Here, per the Modigliani–Miller theorem : if there are no such disadvantages - and companies can raise equity finance cheaply, i.e. can issue stock at low cost - then dividend policy is value neutral; if dividends suffer a tax disadvantage, then increasing dividends should reduce firm value. Regardless, but particularly in

1125-646: A large profit in the purchase and sale of Union bonds once the Battle of Antietam turned the war in the Union's favor. The Morgans also expanded their trade in European securities during a period of industrial expansion, financed by a large deposit from W. W. Corcoran after he liquidated his American holdings out of sympathy for the Confederate cause. Morgan also profited in gold after specie payments were suspended in 1862; its price

1250-434: A listing of the various transaction-types here, and Financial analyst § Investment Banking for a description of the role. Financial risk management , generically, is focused on measuring and managing market risk , credit risk and operational risk . Within corporates, the scope is broadened to overlap enterprise risk management , and then addresses risks to the firm's overall strategic objectives , focusing on

1375-423: A modern CFO. Working capital is the amount of funds that are necessary for an organization to continue its ongoing business operations, until the firm is reimbursed through payments for the goods or services it has delivered to its customers. Working capital is measured through the difference between resources in cash or readily convertible into cash (Current Assets), and cash requirements (Current Liabilities). As

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1500-569: A particular project, and use the weighted average cost of capital (WACC) to reflect the financing mix selected. (A common error in choosing a discount rate for a project is to apply a WACC that applies to the entire firm. Such an approach may not be appropriate where the risk of a particular project differs markedly from that of the firm's existing portfolio of assets.) In conjunction with NPV, there are several other measures used as (secondary) selection criteria in corporate finance; see Capital budgeting § Ranked projects . These are visible from

1625-460: A partner at Howe Mather & Co., the largest dry goods wholesaler in Hartford. His mother Juliet was the daughter of the poet John Pierpont . His uncle James Lord Pierpont composed the famous Christmas song Jingle Bells . Morgan preferred to be called "Pierpont", as opposed to "John". In 1847, when Morgan was ten years old, his grandfather Joseph Morgan died and left the family a large fortune. He

1750-422: A partner in the merchant banking firm George Peabody & Co. For the next fourteen years, he worked as his father's American representative in a series of affiliated New York City banking houses, learning the trade and lifestyle of a bank partner: Duncan, Sherman & Company (1858–1861), his own firm J. Pierpont Morgan & Co. (1861–1864), and finally Dabney Morgan (1864–1872). Dabney, Morgan & Company

1875-433: A philanthropic investment, Morgan gave Tesla $ 150,000 (equivalent to $ 5,493,600 in 2023) to build the system and Tesla offered him a 51% control of the patents. Almost as soon as the letter of agreement was signed Tesla decided to scale up the facility to include his ideas of terrestrial wireless power transmission to make what he thought was a more competitive system. Morgan refused to give Tesla any further money towards

2000-412: A plan for the federal government to buy gold from his and European banks, but it was declined in favor of a plan to sell government bonds directly to the general public. Morgan demanded a meeting with President Grover Cleveland , where he claimed the United States government could default that day if action was not taken. Morgan came up with a plan to use an old civil war statute that allowed Morgan and

2125-567: A result, capital resource allocations relating to working capital are always current, i.e. short-term. In addition to time horizon , working capital management differs from capital budgeting in terms of discounting and profitability considerations; decisions here are also "reversible" to a much larger extent. (Considerations as to risk appetite and return targets remain identical, although some constraints – such as those imposed by loan covenants – may be more relevant here). The (short term) goals of working capital are therefore not approached on

2250-442: A stock buyback, in both cases increasing the value of shares outstanding. Alternatively, some companies will pay "dividends" from stock rather than in cash or via a share buyback as mentioned; see Corporate action . There are several schools of thought on dividends, in particular re their impact on firm value. A key consideration will be whether there are any tax disadvantages associated with dividends: i.e. dividends attract

2375-596: Is an Eye above that is ever upon you and that for every act, word, and deed you will one day be called to give account." He adopted a serious, energetic approach to his work and was praised by his father's friends for his work ethic and capacity for business. At the time Morgan entered the firm, Peabody & Co. was struggling in the wake of the Panic of 1857 , a rash of business failures which dramatically hurt investor confidence in American securities. Peabody & Co., whose business

2500-561: Is concerned with financial policies regarding the payment of a cash dividend in the present or retaining earnings and then paying an increased dividend at a later stage. The policy will be set based upon the type of company and what management determines is the best use of those dividend resources for the firm and its shareholders. Practical and theoretical considerations - interacting with the above funding and investment decisioning, and re overall firm value - will inform this thinking. In general, whether to issue dividends, and what amount,

2625-457: Is concerned with the setting of criteria about which value-adding projects should receive investment funding , and whether to finance that investment with equity or debt capital. Working capital management is the management of the company's monetary funds that deal with the short-term operating balance of current assets and current liabilities ; the focus here is on managing cash, inventories , and short-term borrowing and lending (such as

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2750-414: Is determined on the basis of the company's unappropriated profit (excess cash) and influenced by the company's long-term earning power. In all instances, as above, the appropriate dividend policy is in parallel directed by that which maximizes long-term shareholder value. When cash surplus exists and is not needed by the firm, then management is expected to pay out some or all of those surplus earnings in

2875-419: Is likely, and excess cash surplus exists and is not needed, then management is expected to pay out some or all of those surplus earnings in the form of cash dividends or to repurchase the company's stock through a share buyback program. Achieving the goals of corporate finance requires that any corporate investment be financed appropriately. The sources of financing are, generically, capital self-generated by

3000-432: Is on major " projects " - often investments in other firms , or expansion into new markets or geographies - but may extend also to new plants , new / replacement machinery, new products , and research and development programs; day to day operational expenditure is the realm of financial management as below . In general, each " project 's" value will be estimated using a discounted cash flow (DCF) valuation, and

3125-458: Is raised in order to create, develop, grow or acquire businesses. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. Financial management overlaps with the financial function of the accounting profession . However, financial accounting

3250-557: Is referred to as working capital management . These involve managing the relationship between a firm's short-term assets and its short-term liabilities . In general this is as follows: As above, the goal of Corporate Finance is the maximization of firm value. In the context of long term, capital budgeting, firm value is enhanced through appropriately selecting and funding NPV positive investments. These investments, in turn, have implications in terms of cash flow and cost of capital . The goal of Working Capital (i.e. short term) management

3375-413: Is right-financing whereby investment banks and corporations can enhance investment return and company value over time by determining the right investment objectives, policy framework, institutional structure, source of financing (debt or equity) and expenditure framework within a given economy and under given market conditions. One of the more recent innovations in this area from a theoretical point of view

3500-523: Is the Pecking Order Theory ( Stewart Myers ), which suggests that firms avoid external financing while they have internal financing available and avoid new equity financing while they can engage in new debt financing at reasonably low interest rates . Also, the capital structure substitution theory hypothesizes that management manipulates the capital structure such that earnings per share (EPS) are maximized. An emerging area in finance theory

3625-424: Is the market timing hypothesis . This hypothesis, inspired by the behavioral finance literature, states that firms look for the cheaper type of financing regardless of their current levels of internal resources, debt and equity. The process of allocating financial resources to major investment - or capital expenditure is known as capital budgeting . Consistent with the overall goal of increasing firm value ,

3750-511: Is the reporting of historical financial information, while financial management is concerned with the deployment of capital resources to increase a firm's value to the shareholders. Corporate finance for the pre-industrial world began to emerge in the Italian city-states and the low countries of Europe from the 15th century. The Dutch East India Company (also known by the abbreviation " VOC " in Dutch)

3875-502: Is then observed. This histogram provides information not visible from the static DCF: for example, it allows for an estimate of the probability that a project has a net present value greater than zero (or any other value). Continuing the above example: instead of assigning three discrete values to revenue growth, and to the other relevant variables, the analyst would assign an appropriate probability distribution to each variable (commonly triangular or beta ), and, where possible, specify

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4000-407: Is therefore to ensure that the firm is able to operate , and that it has sufficient cash flow to service long-term debt, and to satisfy both maturing short-term debt and upcoming operational expenses. In so doing, firm value is enhanced when, and if, the return on capital exceeds the cost of capital; See Economic value added (EVA). Managing short term finance and long term finance is one task of

4125-475: The current assets (generally cash and cash equivalents , inventories and debtors ) and the short term financing, such that cash flows and returns are acceptable. Use of the term "corporate finance" varies considerably across the world. In the United States it is used, as above, to describe activities, analytical methods and techniques that deal with many aspects of a company's finances and capital. In

4250-776: The Azores to recover. He convalesced there for almost a year, then returned to Boston to resume his studies. In 1856, his father sent him to Bellerive, a school in the Swiss village of La Tour-de-Peilz , where he gained fluency in French. His father then sent him to the University of Göttingen to improve his German. He attained passable fluency and a degree in art history within six months, completing his studies in 1857. After completing his education, Morgan went to London in August 1857 to join his father, now

4375-600: The Hall Carbine Affair for many years. Debate over Morgan's knowledge and involvement became a cause célèbre within his lifetime, attracting a wide range of commentary, and the debate has persisted long after his death. Interest in Morgan's role in the affair was rekindled in 1910 with the publication of Gustavus Myers ' History of the Great American Fortunes . Myers claimed the rifles were more likely to blow

4500-579: The Panic of 1907 . In December 1912, Morgan testified before the Pujo Committee , a subcommittee of the House Banking and Currency committee . The committee ultimately concluded that a small number of financial leaders was exercising considerable control over many industries. The partners of J.P. Morgan & Co. and directors of First National and National City Bank controlled aggregate resources of $ 22.245 billion, which Louis Brandeis compared to

4625-578: The Rothschilds to sell 3.5 million ounces of gold directly to the U.S. Treasury in exchange for a 30-year bond issue. The episode saved the Treasury but hurt Cleveland's standing with the populist agrarian wing of the Democratic Party , ensuring his political career was over. In the 1896 United States presidential election , bankers came under a withering attack from William Jennings Bryan , and Morgan

4750-488: The United Kingdom and Commonwealth countries, the terms "corporate finance" and "corporate financier" tend to be associated with investment banking – i.e. with transactions in which capital is raised for the corporation or shareholders; the services themselves are often referred to as advisory, financial advisory, deal advisory and transaction advisory services. See under Investment banking § Corporate finance for

4875-476: The United States Steel Corporation . U.S. Steel was the world's first billion-dollar company, with an authorized capitalization of $ 1.4 billion, much larger than any other industrial firm and comparable in size to the largest railroads. U.S. Steel's goals were to achieve greater economies of scale , reduce transportation and resource costs, expand product lines, and improve distribution to allow

5000-495: The Walter model , dividends are paid only if capital retained will earn a higher return than that available to investors (proxied: ROE > Ke ). Management may also want to "manipulate" the capital structure - including by paying or not paying dividends - such that earnings per share are maximized; see Capital structure substitution theory . Managing the corporation's working capital position to sustain ongoing business operations

5125-419: The "flexible and staged nature" of the investment is modelled , and hence "all" potential payoffs are considered. See further under Real options valuation . The difference between the two valuations is the "value of flexibility" inherent in the project. The two most common tools are Decision Tree Analysis (DTA) and real options valuation (ROV); they may often be used interchangeably: Dividend policy

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5250-475: The 1830s until the American Civil War , and sometimes took ownership of slaves when the plantation owners defaulted on loans. JPMorgan estimated that between 1831 and 1865, the two banks accepted approximately 13,000 slaves as collateral and ended up owning about 1,250 slaves. An apology was made in compliance with a rule requiring companies to detail past dealings with the slave trade when doing business with

5375-400: The 1870s. Between 1863 and 1873, the firm's profits from its securities business only exceeded its commissions on trade in 1865. Dabney Morgan traded globally in a variety of commodities, including iron rails, American cotton, Philippine tobacco, Brazilian coffee, and Peruvian guano . Beginning on the advice of Levi P. Morton in 1865, J. P. Morgan secured an exclusive four-year contract with

5500-607: The British government. Morgan had booked a luxury suite with a private promenade deck on the RMS ; Titanic and scheduled to sail on the ill-fated maiden voyage of the ship, which was owned by an IMMC subsidiary, White Star Line , but those plans were later changed. The ship's famous sinking was a financial disaster for IMMC. Analysis of financial records shows that IMMC was over-leveraged and suffered from inadequate cash flow causing it to default on bond interest payments. In response to

5625-471: The DCF and include discounted payback period , IRR , Modified IRR , equivalent annuity , capital efficiency , and ROI . Alternatives (complements) to NPV, which more directly consider economic profit , include residual income valuation , MVA / EVA ( Joel Stern , Stern Stewart & Co ) and APV ( Stewart Myers ). With the cost of capital correctly and correspondingly adjusted, these valuations should yield

5750-423: The DCF model inputs. In many cases, for example R&D projects, a project may open (or close) various paths of action to the company, but this reality will not (typically) be captured in a strict NPV approach. Some analysts account for this uncertainty by adjusting the discount rate (e.g. by increasing the cost of capital ) or the cash flows (using certainty equivalents , or applying (subjective) "haircuts" to

5875-815: The Midwest, they created the Northern Securities Company to merge three of the region's most important railways: the Northern Pacific Railway , the Great Northern Railway , and the Chicago, Burlington and Quincy Railroad . The parties ran into unexpected opposition from President Theodore Roosevelt , who considered the merger bad for consumers and a violation of the seldom enforced Sherman Antitrust Act of 1890 . In 1902, Roosevelt ordered Attorney General Philander Knox to sue to break it up. In 1904,

6000-536: The New York Central. In 1887, Congress passed the Interstate Commerce Act . Morgan set up industry conferences in 1889 and 1890 which paved the way for a wave of consolidations in the early 20th century. In an unprecedented move, he brought together railroad presidents to follow the new laws and write agreements for the maintenance of "public, reasonable, uniform and stable rates." The first of their kind,

6125-605: The Peruvian government to export guano, used in the production of fertilizer and gunpowder, at a two-and-a-half percent commission. To the extent the firm engaged in securities trading, the focus was railroad stock and government bonds. However, railroad construction had halted during the Civil War. Construction did not recover until after 1867, when the firm of Jay Cooke & Company in Philadelphia dominated in getting American government financing. In 1866, J. S. Morgan & Co. did make

6250-738: The South to visit the firm's correspondents in Georgia, Alabama, and Louisiana and to improve his knowledge of the cotton trade. He briefly visited Cuba, where he developed a lifelong taste for Cuban cigars . Most of his time in the South was spent in New Orleans , a leading cotton export hub. He received a stern warning from Duncan Sherman when he conducted an unauthorized trade of coffee at a profit, which he considered his first totally independent transaction. Later that summer, he visited his father in London. They discussed

6375-771: The Supreme Court dissolved the Northern Security company; though Morgan did not lose money, his all-powerful political reputation suffered. In 1900, Morgan began talks to purchase Andrew Carnegie 's steel business and merge it with several other steel, coal, mining and shipping firms. After financing the creation of the Federal Steel Company, Morgan merged it with the Carnegie Steel Company and several other steel and iron businesses (including William Edenbirn's Consolidated Steel and Wire Company) in 1901, forming

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6500-469: The TCI with U.S. Steel, one of its chief competitors. U.S. Steel president Elbert Gary agreed, but was concerned that antitrust implications could obstruct the merger. Morgan sent Gary to see President Theodore Roosevelt , who promised legal immunity for the deal. U.S. Steel thereupon paid $ 30 million for the TCI stock and Moore and Schley was saved. The announcement had an immediate effect; by November 7, 1907,

6625-593: The Treasury George B. Cortelyou earmarked $ 35 million of federal money to deposit in New York banks. Morgan then met with the nation's leading financiers in his New York mansion, where he forced them to devise a plan to meet the crisis. James Stillman , president of the National City Bank, also played a central role. Morgan organized a team of bank and trust executives which redirected money between banks, secured further international lines of credit, and bought up

6750-466: The U.S. government, and resold to arms dealer Arthur M. Eastman for $ 3.50 apiece in June 1861 (equivalent to $ 119 in 2023). After the Union defeat at Bull Run placed a premium on arms, Stevens used the Morgan loan to purchase the rifles from Eastman at $ 11.50 apiece and immediately resold them to Frémont, a longtime acquaintance, at $ 22 each. During the loan's thirty-eight day duration, Morgan held title to

6875-589: The United States and of History of private equity and venture capital . The primary goal of financial management is to maximize or to continually increase shareholder value. This requires that managers find an appropriate balance between: investments in "projects" that increase the firm's long term profitability; and paying excess cash in the form of dividends to shareholders; also considered will be paying back creditor related debt. Choosing between investment projects will thus be based upon several inter-related criteria. (1) Corporate management seeks to maximize

7000-405: The United States and assumed the leading role in financing America's railroads and stabilizing and revitalizing American securities markets. The firm created a national capital market for industrial companies, which had previously existed only for railroads and canals. Drexel Morgan also played an important role in government finance. To restore investor confidence, Drexel Morgan underwrote the pay of

7125-488: The United States to compete globally with the United Kingdom and Germany . U.S. Steel president Charles M. Schwab and others claimed the company's size would enable it to be more aggressive and effective in pursuing distant international markets. Critics regarded U.S. Steel as a monopoly, as it sought to dominate not only steel, but also the construction of bridges, ships, railroad cars, rails, wire, nails, and many other products. With U.S. Steel, Morgan captured two-thirds of

7250-457: The age of 75, leaving his fortune and business to his son, J. P. Morgan Jr. Biographer Ron Chernow estimated his fortune at $ 80   million (equivalent to $ 2.5   billion in 2023). John Pierpont Morgan was born on April 17, 1837, in Hartford, Connecticut to Junius Spencer Morgan (1813–1890) and Juliet Pierpont (1816–1884), of the influential Morgan family . His father, Junius, was then

7375-459: The analyst may specify various revenue growth scenarios (e.g. -5% for "Worst Case", +5% for "Likely Case" and +15% for "Best Case"), where all key inputs are adjusted so as to be consistent with the growth assumptions, and calculate the NPV for each. Note that for scenario based analysis, the various combinations of inputs must be internally consistent (see discussion at Financial modeling ), whereas for

7500-445: The assets of the company). Preferred stock usually carries no voting rights, but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation . Terms of the preferred stock are stated in a "Certificate of Designation". Similar to bonds, preferred stocks are rated by the major credit-rating companies. The rating for preferreds is generally lower, since preferred dividends do not carry

7625-445: The business internationally, Junius Morgan hired Dabney on November 15 as a senior partner. Dabney, a fifty-seven-year-old partner at Duncan Sherman, was widely respected in the business community for his accounting skill and integrity. In the reconfigured firm, J. P. Morgan took on primary responsibility for recruiting new business. Both Dabney Morgan and J.S. Morgan & Co. remained focused on merchant banking and commodities into

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7750-446: The carbines and assumed responsibility for having their barrels replaced with rifled ones before shipment to Frémont. Stevens approached Morgan for another loan, which Morgan refused, instead asking Stevens for the $ 20,000 on the original loan and attempting to remove himself from the transaction. On September 14, Morgan received $ 55,000 from the Army for the carbines, deducted the face value of

7875-410: The city of Chicago. From 1890 to 1913, 42 major corporations were organized or their securities were underwritten , in whole or part, by J.P. Morgan and Company. In October 1861, Morgan married Amelia "Memi" Sturges (1835–1862) at her home on 5 East Fourteenth Street. He had courted her for two years, and when they married, Memi was already seriously ill with tuberculosis . Morgan had to carry her to

8000-415: The company (or appreciate in value) over time to make their investment a profitable purchase. Shareholder value is increased when corporations invest equity capital and other funds into projects (or investments) that earn a positive rate of return for the owners. Investors prefer to buy shares of stock in companies that will consistently earn a positive rate of return on capital in the future, thus increasing

8125-445: The conferences created a community of interest among competing lines, paving the way for the great consolidations of the early 20th century. After the death of Anthony Drexel , the firm was renamed J. P. Morgan & Company in 1895, retaining close ties with Drexel & Company of Philadelphia; Morgan, Harjes & Company of Paris; and J.S. Morgan & Company (after 1910 Morgan, Grenfell & Company ) of London. By 1900, it

8250-417: The decision. Shareholders of a " growth stock ", for example, expect that the company will retain (most of) the excess cash surplus so as to fund future projects internally to help increase the value of the firm. Shareholders of value- or secondary stocks, on the other hand, would prefer management to pay surplus earnings in the form of cash dividends, especially when a positive return cannot be earned through

8375-404: The decisioning here focuses on whether the investment in question is worthy of funding through the firm's capitalization structures (debt, equity or retained earnings as above). Here, to be considered acceptable, the investment must be value additive re: (i) improved operating profit and cash flows ; as combined with (ii) any new funding commitments and capital implications. Re the latter: if

8500-652: The drawing room for a small private ceremony and afterwards to the carriage which took them to the pier. They travelled to Algiers, where he hoped the warm climate would restore their health, but it did not, and she died in Nice in February 1862, four months and ten days after their marriage. On May 31, 1865, Morgan married Frances Louisa "Fanny" Tracy (1842–1924), whom he met at St. George's Church . They had four children: Corporate finance Correspondingly, corporate finance comprises two main sub-disciplines. Capital budgeting

8625-523: The entire U.S. Army in 1877 and bailed out the U.S. government during the Panic of 1895. In his ascent to power, Morgan focused on America's largest business enterprises: railroads. He led the syndicate that broke the government-financing privileges of Jay Cooke and developed and financed a national railroad empire by reorganization and consolidation. He raised large sums in Europe. Rather than participating solely as

8750-462: The evidence suggested that Morgan himself had been a party to the shabby contract or had participated in its profits," though he "failed to exercise the care and caution that he had demonstrated two years earlier in the New Orleans coffee deal." Matthew Josephson , who popularized the term "robber baron", asserted that Morgan certainly did know of the scheme, because he had presented the government with

8875-541: The financial exposures and opportunities arising from business decisions, and their link to the firm’s appetite for risk , as well as their impact on share price . The discipline is thus related to corporate finance, both re operations and funding, as below; and in large firms, the risk management function then overlaps "Corporate Finance", with the CRO consulted on capital-investment and other strategic decisions. Panic of 1857 Too Many Requests If you report this error to

9000-518: The financing and reorganization of railroads, including the major Ohio & Mississippi and Illinois Central lines, for which he personally negotiated the loans. Most of his work involved collecting and transmitting interest and dividend payments, executing orders on the New York Stock Exchange , and conducting credit checks on mercantile houses doing business with Peabody & Co. Starting in early January 1859, Morgan spent several months in

9125-734: The firm and capital from external funders, obtained by issuing new debt and equity (and hybrid- or convertible securities ). However, as above, since both hurdle rate and cash flows (and hence the riskiness of the firm) will be affected, the financing mix will impact the valuation of the firm, and a considered decision is required here. See Balance sheet , WACC . Finally, there is much theoretical discussion as to other considerations that management might weigh here. Corporations may rely on borrowed funds (debt capital or credit ) as sources of investment to sustain ongoing business operations or to fund future growth. Debt comes in several forms, such as through bank loans, notes payable, or bonds issued to

9250-420: The firm's capital resources and surplus cash on investments and projects so the company can continue to expand its business operations into the future. When companies reach maturity levels within their industry (i.e. companies that earn approximately average or lower returns on invested capital), managers of these companies will use surplus cash to payout dividends to shareholders. Thus, when no growth or expansion

9375-491: The firm. The hurdle rate is the minimum acceptable return on an investment – i.e., the project appropriate discount rate . The hurdle rate should reflect the riskiness of the investment, typically measured by volatility of cash flows, and must take into account the project-relevant financing mix. Managers use models such as the CAPM or the APT to estimate a discount rate appropriate for

9500-463: The forecast numbers; see Penalized present value ). Even when employed, however, these latter methods do not normally properly account for changes in risk over the project's lifecycle and hence fail to appropriately adapt the risk adjustment. Management will therefore (sometimes) employ tools which place an explicit value on these options. So, whereas in a DCF valuation the most likely or average or scenario specific cash flows are discounted, here

9625-412: The form of cash dividends or to repurchase the company's stock through a share buyback program. Thus, if there are no NPV positive opportunities, i.e. projects where returns exceed the hurdle rate, and excess cash surplus is not needed, then management should return (some or all of) the excess cash to shareholders as dividends. This is the general case, however the "style" of the stock may also impact

9750-460: The formation of International Mercantile Marine Co. (IMMC), an Atlantic shipping company which absorbed several major American and British lines, in an attempt to monopolize the shipping trade. Morgan hoped to dominate transatlantic shipping through interlocking directorates and contractual arrangements with the railroads, but that proved impossible because of the unscheduled nature of sea transport, American antitrust legislation, and an agreement with

9875-469: The future; see Dividend signaling hypothesis The second set relates to management's thinking re capital structure and earnings, overlapping the above . Under a "Residual dividend policy" - i.e. as contrasted with a "smoothed" payout policy - the firm will use retained profits to finance capital investments if less / cheaper than the same via equity financing; see again Pecking order theory . Similarly, under

10000-481: The initial investment outlay is the NPV . See Financial modeling § Accounting for general discussion, and Valuation using discounted cash flows for the mechanics, with discussion re modifications for corporate finance. The NPV is greatly affected by the discount rate . Thus, identifying the proper discount rate – often termed, the project "hurdle rate" – is critical to choosing appropriate projects and investments for

10125-449: The investment is large in the context of the firm as a whole, so the discount rate applied by outside investors to the (private) firm's equity may be adjusted upwards to reflect the new level of risk, thus impacting future financing activities and overall valuation. More sophisticated treatments will thus produce accompanying sensitivity - and risk metrics , and will incorporate any inherent contingencies . The focus of capital budgeting

10250-405: The limitations of sensitivity and scenario analyses by examining the effects of all possible combinations of variables and their realizations" is to construct stochastic or probabilistic financial models – as opposed to the traditional static and deterministic models as above. For this purpose, the most common method is to use Monte Carlo simulation to analyze the project's NPV. This method

10375-422: The loan plus expenses and interest, and passed the remainder to Stevens. By September, when Morgan received payment, the deal was already controversial. Military officials felt Frémont had overpaid, and an 1863 House of Representatives report indicted the profiteers as "worse than traitors in arms." Though Morgan was neither criticized nor censured during contemporary investigations, his name remained connected with

10500-527: The market value of the stock of that corporation. Shareholder value may also be increased when corporations payout excess cash surplus (funds from retained earnings that are not needed for business) in the form of dividends. Preferred stock is a specialized form of financing which combines properties of common stock and debt instruments, and is generally considered a hybrid security. Preferreds are senior (i.e. higher ranking) to common stock , but subordinate to bonds in terms of claim (or rights to their share of

10625-430: The nation's financial situation, although the economic consequences were ultimately minor. In 1862, Morgan made his cousin, James Goodwin, a partner. The firm received a serious boost when Morgan's father succeeded George Peabody as head of the London office. J.S. Morgan transferred all of the firm's remaining commercial credit and securities accounts from Duncan Sherman, and by the end of 1862, J. Pierpont Morgan & Co.

10750-491: The obligation in full whenever the company feels it is in their best interest to pay off the debt payments. If interest expenses cannot be made by the corporation through cash payments, the firm may also use collateral assets as a form of repaying their debt obligations (or through the process of liquidation ). Corporations can alternatively sell shares of the company to investors to raise capital. Investors, or shareholders, expect that there will be an upward trend in value of

10875-408: The observed or supposed correlation between the variables. These distributions would then be "sampled" repeatedly – incorporating this correlation – so as to generate several thousand random but possible scenarios, with corresponding valuations, which are then used to generate the NPV histogram. The resultant statistics ( average NPV and standard deviation of NPV) will be a more accurate mirror of

11000-465: The opportunity with the highest value, as measured by the resultant net present value (NPV) will be selected (first applied in a corporate finance setting by Joel Dean in 1951). This requires estimating the size and timing of all of the incremental cash flows resulting from the project. Such future cash flows are then discounted to determine their present value (see Time value of money ). These present values are then summed, and this sum net of

11125-419: The panic was over. While conservatives hailed Morgan for civic responsibility, strengthening the national economy, and devotion to the arts and religion, critics of banking and consolidation viewed him as one of the leading figures in the system they rejected. They attacked Morgan for the terms of his 1895 loan of gold to the U.S. Treasury. Many, including writer Upton Sinclair , attacked him for his handling of

11250-399: The planning of value-adding, long-term corporate financial projects relating to investments funded through and affecting the firm's capital structure , and where management must allocate the firm's limited resources between competing opportunities (projects). Capital budgeting is thus also concerned with the setting of criteria about which projects should receive investment funding to increase

11375-492: The plummeting stocks of healthy corporations. A delicate issue arose regarding the brokerage firm of Moore and Schley, which was deeply invested in the Tennessee Coal, Iron and Railroad Company (TCI). Moore and Schley had used over $ 6 million of TCI stock as collateral for loans to Wall Street banks, which the firm now could not pay. If Moore and Schley failed, it could precipitate a larger crisis. Thus, Morgan proposed merging

11500-506: The project and, with Tesla unable to secure further investment capital, Wardenclyffe's development stalled and the site was abandoned by 1906. The Northern Pacific Railway went bankrupt in the Panic of 1893 . The bankruptcy wiped out the railroad's bondholders, leaving it free of debt, and a complex financial battle for its control ensued. In 1901, a compromise was reached between Morgan, New York financier E. H. Harriman and Minnesota railroad builder James J. Hill . To reduce competition in

11625-418: The project's "randomness" than the variance observed under the scenario based approach. (These are often used as estimates of the underlying " spot price " and volatility for the real option valuation below; see Real options valuation § Valuation inputs .) A more robust Monte Carlo model would include the possible occurrence of risk events - e.g., a credit crunch - that drive variations in one or more of

11750-411: The prospects of Morgan's going into business for himself, and Morgan courted Amelia Sturges, whom he later married. As the American Civil War began, business slowed, delaying Morgan's efforts to open his own office. He opened J. Pierpont Morgan & Company some time between April and July 1861, conducting operations out of a one-room office at 53 Exchange Place. As he anticipated, most of his business

11875-505: The public. Bonds require the corporation to make regular interest payments (interest expenses) on the borrowed capital until the debt reaches its maturity date, therein the firm must pay back the obligation in full. One exception is zero-coupon bonds (or "zeros"). Debt payments can also be made in the form of sinking fund provisions, whereby the corporation pays annual installments of the borrowed debt above regular interest charges. Corporations that issue callable bonds are entitled to pay back

12000-488: The reinvestment of undistributed earnings; a share buyback program may be accepted when the value of the stock is greater than the returns to be realized from the reinvestment of undistributed profits. Management will also choose the form of the dividend distribution, as stated, generally as cash dividends or via a share buyback . Various factors may be taken into consideration: where shareholders must pay tax on dividends , firms may elect to retain earnings or to perform

12125-648: The result was a "paternalistic" labor policy. Morgan suffered a rare business defeat in 1902 when he attempted to build and operate a line on the London Underground . Transit magnate Charles Tyson Yerkes thwarted Morgan's effort to obtain parliamentary authority to build the Piccadilly, City and North East London Railway , a subway line that would have competed with "tube" lines controlled by Yerkes. Morgan called Yerkes' coup "the greatest rascality and conspiracy I ever heard of". In 1902, J.P. Morgan & Co. financed

12250-478: The rifleman's thumb off than they were to cause any damage to the enemy. An earlier version of the carbine rifle was known to be subject to this problem. R. Gordon Wasson , later the head of public relations for J.P. Morgan & Co., argued that there was no evidence Morgan knew that he was participating in a scheme to profit. Vincent Carosso, author of an academic history of the Morgan house, concurs that Stevens "used Morgan's name" to cover his greed and that "none of

12375-422: The rise of managerial capitalism and common stock finance, with share capital raised through listings , in preference to other sources of capital . Modern corporate finance, alongside investment management , developed in the second half of the 20th century, particularly driven by innovations in theory and practice in the United States and Britain. Here, see the later sections of History of banking in

12500-440: The same basis as (long term) profitability, and working capital management applies different criteria in allocating resources: the main considerations are (1) cash flow / liquidity and (2) profitability / return on capital (of which cash flow is probably the most important). Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing

12625-416: The same guarantees as interest payments from bonds and they are junior to all creditors. Preferred stock is a special class of shares which may have any combination of features not possessed by common stock. The following features are usually associated with preferred stock: As mentioned, the financing mix will impact the valuation of the firm: there are then two interrelated considerations here: Much of

12750-423: The same result as the DCF. See also list of valuation topics . Given the uncertainty inherent in project forecasting and valuation, analysts will wish to assess the sensitivity of project NPV to the various inputs (i.e. assumptions) to the DCF model . In a typical sensitivity analysis the analyst will vary one key factor while holding all other inputs constant, ceteris paribus . The sensitivity of NPV to

12875-412: The scenario approach above, the simulation produces several thousand random but possible outcomes, or trials, "covering all conceivable real world contingencies in proportion to their likelihood;" see Monte Carlo Simulation versus "What If" Scenarios . The output is then a histogram of project NPV, and the average NPV of the potential investment – as well as its volatility and other sensitivities –

13000-403: The second (more realistic) case, other considerations apply. The first set relates to investor preferences and behavior (see Clientele effect ). Investors are seen to prefer a “bird in the hand” - i.e. cash dividends are certain as compared to income from future capital gains - and in fact, may employ some form of dividend valuation model in valuing shares. Relatedly, investors will then prefer

13125-444: The sensitivity approach these need not be so. An application of this methodology is to determine an " unbiased " NPV, where management determines a (subjective) probability for each scenario – the NPV for the project is then the probability-weighted average of the various scenarios; see First Chicago Method . (See also rNPV , where cash flows, as opposed to scenarios, are probability-weighted.) A further advancement which "overcomes

13250-414: The sinking, Morgan purportedly said: Monetary losses amount to nothing in life. It is the loss of life that counts. It is that frightful death. The Panic of 1907 was a financial crisis that almost crippled the American economy. Major New York banks were on the verge of bankruptcy and there was no mechanism to rescue them, until Morgan stepped in to help resolve the crisis. To ease the crisis, Secretary of

13375-466: The steel market, and Schwab was confident that the company would soon hold a 75% market share. U.S. Steel also faced criticism for its labor policies. U.S. Steel was non-union and used aggressive tactics to identify and root out pro-union "troublemakers." The lawyers and bankers who had organized the merger, including Morgan, were more concerned with long-range profits, stability, good public relations, and avoiding trouble. His views generally prevailed, and

13500-415: The terms on credit extended to customers). The terms corporate finance and corporate financier are also associated with investment banking . The typical role of an investment bank is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs. Thus, the terms "corporate finance" and "corporate financier" may be associated with transactions in which capital

13625-480: The theory here, falls under the umbrella of the Trade-Off Theory in which firms are assumed to trade-off the tax benefits of debt with the bankruptcy costs of debt when choosing how to allocate the company's resources. However economists have developed a set of alternative theories about how managers allocate a corporation's finances. One of the main alternative theories of how firms manage their capital funds

13750-490: The twentieth century. Over the course of his career on Wall Street, Morgan spearheaded the formation of several prominent multinational corporations including U.S. Steel , International Harvester , and General Electric . He and his partners also held controlling interests in numerous other American businesses including Aetna , Western Union , the Pullman Car Company , and 21 railroads. His grandfather Joseph Morgan

13875-535: The value of all the property in the twenty-two states west of the Mississippi River . In the early 2000s, an investigation by historian James Lide discovered that through parts of its business, JPMorgan Chase accepted thousands of slaves as collateral on loans made to plantation owners in the early 19th century, and that it ended up owning several hundred slaves. The banks in question, Citizens' Bank and Canal Bank, both now part of JPMorgan, served plantations from

14000-512: The value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. (2) These projects must also be financed appropriately. (3) If no growth is possible by the company and excess cash surplus is not needed to the firm, then financial theory suggests that management should return some or all of the excess cash to shareholders (i.e., distribution via dividends). The first two criteria concern " capital budgeting ",

14125-536: The value of the firm, and whether to finance that investment with equity or debt capital. Investments should be made on the basis of value-added to the future of the corporation. Projects that increase a firm's value may include a wide variety of different types of investments, including but not limited to, expansion policies, or mergers and acquisitions . The third criterion relates to dividend policy . In general, managers of growth companies (i.e. firms that earn high rates of return on invested capital) will use most of

14250-443: Was among many who donated heavily to Republican William McKinley . In 1900, the inventor Nikola Tesla convinced Morgan he could build a trans-Atlantic wireless communication system based on his theories of Earth and atmospheric electrical conduction (eventually sited at Wardenclyffe ) that would outperform the short range radio wave-based wireless telegraph system then being demonstrated by Guglielmo Marconi . In what may have been

14375-640: Was co-founded by Charles H. Dabney and Jim Goodwin. Morgan quickly moved on to New York City to begin work at Duncan Sherman as a junior clerk. Through his father's reputation and his position as the obvious successor to the Peabody house, he was quickly among the most sought-after young men on Wall Street and enjoyed the company of many of New York's leading citizens. Morgan had a great deal of independence in both his investment decisions and lifestyle, owing partly to his father's faith in Morgan's austere religious discipline. "Remember," J.S. Morgan wrote his son, "that there

14500-593: Was considered one of the stronger private banking houses on Wall Street. In August 1861, Morgan lent $ 20,000 (equivalent to $ 532,770 in 2023) to Simon Stevens, a well-connected New York City attorney and former secretary to Thaddeus Stevens . Stevens used the money to purchase five thousand carbines for resale to General John C. Frémont , commander of the Department of the West. The carbines in question were developed by John H. Hall and manufactured by Simeon North, purchased by

14625-598: Was educated in public and private schools in New England, where he attended West Middle School and Cheshire Academy. Junius soon became a senior partner at the rechristened Mather Morgan & Co. In September 1851, he passed the entrance exam for The English High School of Boston, which specialized in mathematics for careers in commerce. In April 1852, he suffered from rheumatic fever , an illness whose symptoms became more severe as his life progressed and ultimately left him in such pain that he could not walk. Junius sent him to

14750-505: Was focused on the United States, was particularly threatened when a few of its American correspondent banks were forced to suspend operations. The house's creditors, including Baring Brothers , demanded payment; Peabody defied them, daring his rivals to put him out of business, and turned to the Bank of England for a loan in November 1857. Morgan himself expressed surprise that the famed Barings house

14875-438: Was for his father and consistent with the work he had managed at Duncan Sherman. Morgan avoided serving during the war by paying a substitute $ 300 to take his place. The Civil War radically altered Morgan's focus by virtually eliminating his cotton business and drastically reducing iron imports for American railroads in favor of securities and foreign exchange operations. The Morgans, trading through J. P.'s New York office, made

15000-419: Was introduced to finance by David B. Hertz in 1964, although it has only recently become common: today analysts are even able to run simulations in spreadsheet based DCF models, typically using a risk-analysis add-in, such as @Risk or Crystal Ball . Here, the cash flow components that are (heavily) impacted by uncertainty are simulated, mathematically reflecting their "random characteristics". In contrast to

15125-407: Was largely pegged to the possibility of a Union victory. In October 1863, he and Edward B. Ketchum transferred $ 1.15 million (equivalent to $ 22,355,000 in 2023) in gold to England, forcing a price spike and allowing both men to sell their holdings at a large profit. Critics have long considered the deal a speculative effort to corner the American gold market and evidence of Morgan's insensitivity to

15250-498: Was not more accommodating. The loan secured the house's survival and the London office was stabilized, but Duncan Sherman came under criticism on Wall Street, and the Mercantile Agency recommended its dissolution. J. P. Morgan urged his father to stand by Duncan Sherman in the face of "outrageous" reports "of Browns & Barings getting the credit for what they never did." While at Duncan Sherman, Morgan gained early experience in

15375-694: Was one of the co-founders of Aetna. Through his holdings, Morgan exercised enormous influence over capital markets in the United States. During the Panic of 1907 , he organized a coalition of financiers that saved the American monetary system from collapse. As the Progressive Era 's leading financier, Morgan's dedication to efficiency and modernization helped transform the shape of the American economy . Adrian Wooldridge characterized Morgan as America's "greatest banker". Morgan died in Rome, Italy, in his sleep in 1913 at

15500-459: Was one of the world's most powerful banking houses, focused primarily on reorganizations and consolidations. Morgan had many partners over the years, such as George Walbridge Perkins , but always remained firmly in charge. His international reputation as a financier began to draw investors to the businesses that he took over. At the depths of the Panic of 1893 , around 1895, the U.S. Treasury nearly depleted its gold reserves. Morgan put forward

15625-548: Was the first publicly listed company ever to pay regular dividends . The VOC was also the first recorded joint-stock company to get a fixed capital stock . Public markets for investment securities developed in the Dutch Republic during the 17th century. By the early 1800s, London acted as a center of corporate finance for companies around the world, which innovated new forms of lending and investment; see City of London § Economy . The twentieth century brought

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