5/23/2018 ch 1 f3716s

1/20

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

5/23/2018 ch 1 f3716s

2/20

1-2

Chapter Outline

Corporate Finance and the Financial

Manager

Forms of Business Organization

The Goal of Financial Management

The Agency Problem and Control of theCorporation

Financial Markets and the Corporation

Chapter Outline

5/23/2018 ch 1 f3716s

3/20

1-3

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?

5/23/2018 ch 1 f3716s

4/20

1-4

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

5/23/2018 ch 1 f3716s

5/20

1-5

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?

5/23/2018 ch 1 f3716s

6/20

1-6

Forms of BusinessOrganization in the U.S.

Single Owner

SoleProprietorshi

p

General

LimitedPartnership

C-Corporation

S-Corporation

Limited Liability Company(LLC)

Corporation

5/23/2018 ch 1 f3716s

7/20

1-7

Sole Proprietorship

Advantages:

Easiest to start

Least regulated

Single owner keeps all the

profits

Taxed once as personal

income

5/23/2018 ch 1 f3716s

8/20

1-8

Sole ProprietorshipDisadvantages:

Limited to life of owner

Equity capital limited toowners personal wealth

Unlimited liability

Difficult to sell ownershipinterest

5/23/2018 ch 1 f3716s

9/20

1-9

Partnership

Advantages:

Two or more owners

More capital available

Relatively easy to start

Income taxed once aspersonal income

5/23/2018 ch 1 f3716s

10/20

1-10

Disadvantages:

Unlimited liability

General partnership

Limited partnership

Partnership dissolves when

one partner dies or wishes to

sell

Difficult to transfer

ownership

Partnership

http://www.nolo.com/encyclopedia/articles/sb/which_form.html

5/23/2018 ch 1 f3716s

11/20

1-11

Corporation

Advantages:

Limited liability

Unlimited life

Separation of ownership

and management

Transfer of ownership is

easy

Easier to raise capital

5/23/2018 ch 1 f3716s

12/20

1-12

CorporationDisadvantages:

Separation of ownership

and management

Double taxation (income

taxed at the corporate

rate and then dividends

taxed at the personal

rate)

5/23/2018 ch 1 f3716s

13/20

1-13

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?

5/23/2018 ch 1 f3716s

14/20

1-14

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

5/23/2018 ch 1 f3716s

15/20

1-15

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

5/23/2018 ch 1 f3716s

16/20

1-16

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/

5/23/2018 ch 1 f3716s

17/20

1-17

Ethics Issues

Is it ethical for tobacco companies to sell a product that is known tobe addictive and a danger to the health of the user? Is it relevantthat the product is legal?

Should boards of directors consider only price when faced with abuyout offer?

Is it ethical to concentrate only on shareholder wealth, or shouldstakeholders as a whole be considered?

Should firms be penalized for attempting to improve returns bystifling competition (e.g., Microsoft)?

5/23/2018 ch 1 f3716s

18/20

1-18

Terminology

CFO (Chief Financial Officer)

Sole Proprietorship Partnership

C-, S-, and LLC Corporations

Agency Problem

5/23/2018 ch 1 f3716s

19/20

1-19

1. The CFOs rolein a corporation.

2. Why does the corporationclassificationmatter?

3. Corporate managers possible

conflicting goal with theowners of the company.

What are the most

important topics of this

chapter?

5/23/2018 ch 1 f3716s

20/20

1-20