Fundamentals of Corporate Finance Fundamentals of Chapter 1

Fundamentals of Corporate Finance

Fundamentals of Chapter 1 Corporate Finance Fourth Edition The Firm & The Financial Manager Irwin/Mc. Graw Hill Copyright © 2003 by The Mc. Graw-Hill Companies, Inc. All rights reserved

Topics Covered Ø Organizing a Business ØThe Role of The Financial Manager ØWho Is The Financial Manager? ØGoals of the Corporation ØCEO Pay

Sole Proprietorships Organizing A Business Partnerships Corporations

Characteristics of Business Organizations Characteristics Ownership Manager-Owner Seperation Sole Prop. Partner. Corp. Manager Partners Shareholders Same Usually Seperated Owner’s Liability Unlimited Taxing Personal Income Limited Personal Income &Corporate Tax

Corporate Structure Sole Proprietorships Unlimited Liability Personal tax on profits Partnerships Limited Liability Corporations Corporate tax on profits + Personal tax on dividends

Assets Real Assets: Used to produce goods & services Tangible: Machinery, factory, offices Intangible: Trade mark, patents, technical expertise Financial Assets: Claims to the income generated by real assets. Also called securities.

The Role of Financial Manager Firm’s Operations Real Assets Financial Manager Money Flows Investors

Basic Problems Capital Budgeting Decision What real should the Firm acquire? Financing Decision How should cash be raised to finance real investments?

Goals of The Financial Management n n Shareholders desire wealth maximization Do managers maximize shareholder wealth? Max VALUE = f ( I, F ) Max VALUE = f ( I, F, D )

The Role of Financial Markets Firm’s Operations Real Assets Financial Markets Stock Markets Bond Markets Foreign Exchange etc. Financial Manager Money Flows Investors Financial Intermediaries Mutual Funds Pension Funds Financial Institutions Banks Insurance Companies