Fundamentals of Corporate Finance Chapter 1 The Corporation

Fundamentals of Corporate Finance Chapter 1 The Corporation and The Financial Manager Fifth Edition Slides by Matthew Will Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 2 Topics Covered ÜInvestment and Financing Decisions ÜWhat is Corporation? ÜWho Is The Financial Manager? ÜGoals of the Corporation ÜCareers in Finance Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 3 The Role of The Financial Manager ÜCapital Budgeting Decision èDecision to invest in tangible or intangible assets. Ü…also called the Investment Decision Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 4 The Role of The Financial Manager è“Capital Mc. Graw-Hill/Irwin Budgeting” Tangible Assets Nontangible Assets Toyota in Texas Gillette’s Mach 3 Razor @ $800 million @ $300 million Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 5 The Role of The Financial Manager ÜFinancing Decision èRaising money that the firm needs for its investments and operations. ÜCapital Structure èThe Mc. Graw-Hill/Irwin mix of long term debt and equity financing. Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 6 The Role of The Financial Manager (2) Firm's operations Real assets (1) Financial Manager (4 a) Investors (4 b) (3) (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4 a) Cash reinvested (4 b) Cash returned to investors Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 7 What is a Corporation? ÜTypes of Corporations èPublic Companies èPrivate Corporations èLimited Liability Corporations (LLC) Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 8 Organizing a Business ÜTypes of Business Organizations èSole Proprietorships èPartnerships èCorporations èLimited Liability Partnerships Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 9 Organizing a Business Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 10 Corporate Structure Sole Proprietorships Unlimited Liability Personal tax on profits Partnerships Limited Liability Corporations Corporate tax on profits + Personal tax on dividends Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 11 Who is The Financial Manager? Chief Financial Officer Treasurer Mc. Graw-Hill/Irwin Controller Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 12 Goals of The Corporation ÜShareholders desire wealth maximization ÜDo managers maximize shareholder wealth? ÜMangers have many constituencies “stakeholders” Ü“Agency Problems” represent the conflict of interest between management and owners Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 13 Goals of The Corporation Ethics & Management Objectives Ü Does value maximization justify unethical behavior? Ü Enron example Ü World. Com example Ü AIG example Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 14 Goals of The Corporation Agency Problem Solutions 1 - Compensation plans 2 - Board of Directors 3 - Takeovers 4 - Specialist Monitoring 5 - Auditors Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 15 Careers in Finance Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved

1 - 16 Careers in Finance Mc. Graw-Hill/Irwin Copyright © 2007 by The Mc. Graw-Hill Companies, Inc. All rights reserved