mba 7200 chapter 1

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Introduction to Corporate FinanceEric J. McLaughlin, Ph.D.

Chapter

1

Copyri ght 2013 by The McGraw-H il l Companies, Inc. All ri ghts reserved.McGraw-Hill/Irwin

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Corporate FinanceSome important questions that are answered

using finance:

1. What long-term investments should the

firm take on?

2. Where will we get the long-term

financing to pay for the investment?

3. How will we manage the everyday

financial activities of the firm?

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Financial Managers

Chief Financial Officer

(CFO):The top financial

manager within a firm

Treasurer: Oversees cashmanagement, credit

management, capital

expenditures, and financial

planning

Controller: Oversees taxes,

cost accounting, financial

accounting and data

processing

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Financial Management Decisions

Capital budgeting

What long-term investments or projectsshould the business take on?

Capital structure

How should we pay for our assets? Should we use debt or equity?

Working capital management

How do we manage the day-to-day financesof the firm?
http://www.nolo.com/encyclopedia/articles/sb/which_form.html

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Forms of BusinessOrganization in the U.S.

Single Owner

SoleProprietorshi

p

General

LimitedPartnership

C-Corporation

S-Corporation

Limited Liability Company(LLC)

Corporation

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Sole Proprietorship

Advantages:

Easiest to start

Least regulated

Single owner keeps all the

profits

Taxed once as personal

income

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Sole ProprietorshipDisadvantages:

Limited to life of owner

Equity capital limited toowners personal wealth

Unlimited liability

Difficult to sell ownershipinterest

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Partnership

Advantages:

Two or more owners

More capital available

Relatively easy to start

Income taxed once aspersonal income

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Disadvantages:

Unlimited liability

General partnership

Limited partnership

Partnership dissolves when

one partner dies or wishes to

sell

Difficult to transfer

ownership

Partnership

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Corporation

Advantages:

Limited liability

Unlimited life

Separation of ownership

and management

Transfer of ownership is

easy

Easier to raise capital

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CorporationDisadvantages:

Separation of ownership

and management

Double taxation (income

taxed at the corporate

rate and then dividends

taxed at the personal

rate)

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Goal of Financial Management

What should be the goal of a corporation?Maximize profits?

Minimize costs?

Maximize market share?Maximize the current value of the companys

stock?

Does this mean we should do anything and

everything to maximize owner wealth?

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The Agency ProblemAgency relationship

Principal hires an agent to represent his/herinterests

Stockholders (principals) hire managers(agents) to run the company

Agency problem

Conflict of interest between principal andagent

Management goals and agency costs

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Managing ManagersManagerial compensation

Incentives can be used toalign management andstockholder interests

The incentives need to bestructured carefully to makesure that they achieve theirgoal

Corporate control

The threat of a takeovermay result in bettermanagement

Other stakeholders

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Work the Web Example

The Internet provides a wealth of information

about individual companies

One excellent site is finance.yahoo.com Google--- Forbes name of f i rm Ratios

Click on the web surfer to go to the site, choose

a company and see what information you canfind!
http://www.finance.yahoo.com/http://finance.yahoo.com/http://www.finance.yahoo.com/

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Financial Markets

Cash flows to the firm

Primary vs. secondary markets

Dealer vs. auction markets

Listed vs. over-the-counter

securities

NYSE

NASDAQ
http://www.nyse.com/http://www.nasdaq.com/http://www.nasdaq.com/http://www.nyse.com/

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Ethics Issues

Is it ethical for tobacco companies to sell a product thatis known to be addictive and a danger to the health ofthe user? Is it relevant that the product is legal?

Should boards of directors consider only price whenfaced with a buyout offer?

Is it ethical to concentrate only on shareholder wealth,

or should stakeholders as a whole be considered?

Should firms be penalized for attempting to improvereturns by stifling competition (e.g., Microsoft)?

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Key Concepts and Skills

Role of the financial manager

Corporation classifications

Goal of financial management

Potential conflicts between

financial managers andshareholders

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1. The CFOs role in a corporation.

2. Why does the corporationclassification matter?

3. Corporate managers possible

conflicting goal with theowners of the company.

What are the most

important topics of this

chapter?

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mba 7200 chapter 1

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