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Chapter Approach
Chapter 1 Firm Goals/Governance Road to success with
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McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Fundamentals of Corporate
Finance
Sixth Edition
Richard A. Brealey
Stewart C. Myers
Alan J. Marcus
Slides by
Matthew Will
Chapter 1
McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Goals and Governance of the Firm
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Topics Covered
Investment and Financing Decisions What is a Corporation? Who Is The Financial Manager? Goals of the Corporation Careers in Finance
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The Role of The Financial Manager
Capital Budgeting Decision Decision to invest in tangible or intangible
assets.
…also called the Investment Decision
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The Role of The Financial Manager
“Capital Budgeting”
Tangible Assets
Toyota Plants
@ $3 billion new debt
Intangible Assets
Gillette’s Fusion Razor
@ $200 million
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The Role of The Financial Manager
Financing Decision The form and amount of financing of a firm’s
investments.
Capital Structure The mix of long term debt and equity financing.
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Financial
Manager
Firm's
operations Investors
(1) Cash raised from investors
(1)
(2) Cash invested in firm
(2)
(3) Cash generated by operations (timber harvest)
(3)
(4a) Cash reinvested
(4a)
(4b) Cash returned to investors
(4b)
The Role of The Financial Manager
Real assets
(timberland)
(stockholders/ debtholders save and invest in a closely held firm.
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The Role of The Financial Manager
Real Assets Assets used to produce goods and services.
• Tangible – machines, buildings, land
• Intangible – brand value, logistical support
Financial Assets Financial claims to the income generated by the
firm’s real assets.
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What is a Corporation?
Corporation A business organized as a separate legal entity
owned by stockholders.
Types of Corporations Public Companies Private Corporations Limited Liability Corporations (LLC)
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Organizing a Business
Types of Business Organizations Sole Proprietorships Partnerships Corporations Limited Liability Options
• Limited Liability Partnerships
• Limited Liability Corporations
• Professional Corporations
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Organizing a Business
Sole Proprietorship Partnership Corporation
Who owns the business?
The manager Partners Stockholders
Are managers and owners separate?
No No Usually
What is the owner's liability?
Unlimited Unlimited Limited
Are the owner and business taxed
separately?No No Yes
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Corporate Structure
Sole Proprietorships
Corporations
Partnerships
Limited Liability
Corporate tax on profits +
Personal tax on dividends
Unlimited Liability
Personal tax on profits
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Who is The Financial Manager?
Chief Financial Officer
Treasurer Controller
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Who is The Financial Manager?
Chief Financial Officer (CFO) Oversees the treasurer and controller and sets
overall financial strategy.
Treasurer Responsible for financing, cash management, and
relationships with banks and other financial institutions.
Controller Responsible for budgeting, accounting, and taxes.
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Goals of The Corporation
Shareholders desire wealth maximization
Do managers maximize shareholder wealth?
Mangers have many constituencies “stakeholders”
“Agency Problems” represent the conflict of interest between management and owners
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Goals of The Corporation
Ethics & Management Objectives Does value maximization justify unethical
behavior? Enron example WorldCom example Putnam example
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Agency Problem
Difference in Information Stock prices and returns Issues of shares and
other securities Dividends Financing
Different Objectives Managers vs.
stockholders Top mgmt vs.
operating mgmt Stockholders vs. banks
and lenders
Ownership vs. Management
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Agency Problem
Agency Problems Managers, acting as agents for stockholders, may
act in their own interests rather than maximizing value.
Stakeholder Anyone with a financial interest in the firm.
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Goals of The Corporation
Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Legal and Regulatory Requirements
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Careers in FinanceCareer Annual SalaryCommercial Banking
Loan Officer $ 90,000 +Department Manager $ 200,000 +
Corporate FinanceFinancial Analyst $ 61-78,000Credit Manager $ 73-92,000Chief Financial Officer $ 222-367,000
Investment Banking (bulge bracket)First Year Analyst $ 90-180,000First Year Associate $ 200-350,000Assistant Vice President $ 300-900,000Director/Principal $ 500k - 2 milManaging Director/Partner $ 600k - 30 milDepartment Head $ 1 mil - 70 mil
Money ManagementPortfolio Manager $ 500,000 +Bank Trust Department $ 60k - 150,000
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Careers in Finance
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Web Resources