Scribd
Upload
72 views17 pages

Chap001 Foundation

This chapter introduces key concepts in corporate finance including the role of financial managers, forms of business organization, the goal of maximizing shareholder wealth, and agency problems that can arise between owners and managers. It also discusses primary and secondary financial markets and how corporations obtain financing.

Uploaded by

mostafakhaled333
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
72 views17 pages

Chap001 Foundation

This chapter introduces key concepts in corporate finance including the role of financial managers, forms of business organization, the goal of maximizing shareholder wealth, and agency problems that can arise between owners and managers. It also discusses primary and secondary financial markets and how corporations obtain financing.

Uploaded by

mostafakhaled333
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 17

1

Introduction To
Corporate Finance

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts and Skills

 Know the basic types of financial


management decisions and the role of the
financial manager
 Know the financial implications of the
different forms of business organization
 Know the goal of financial management
 Understand the conflicts of interest that
can arise between owners and managers
 Understand the various types of financial
markets
1-1
Chapter Outline

 Corporate Finance and the


Financial Manager
 Forms of Business Organization
 The Goal of Financial Management
 The Agency Problem and Control
of the Corporation
 Financial Markets and the
Corporation 1-2
Corporate Finance

 Some important questions that are


answered using finance
 What long-term investments should the
firm take on?
 Where will we get the long-term
financing to pay for the investment?
 How will we manage the everyday
financial activities of the firm?
1-3
Financial Manager

 Financial managers try to answer some or


all of these questions
 The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
 Treasurer – oversees cash management, credit
management, capital expenditures, and
financial planning
 Controller – oversees taxes, cost accounting,
financial accounting and data processing
1-4
Financial Management Decisions

 Capital budgeting
 What long-term investments or projects
should 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
finances of the firm?
1-5
Forms of Business Organization

 Three major forms in the United


States
 Sole proprietorship
 Partnership
 General
 Limited
 Corporation
 S-Corp
 Limited liability company
1-6
Sole Proprietorship

 Advantages  Disadvantages
 Easiest to start  Limited to life of
 Least regulated owner
 Single owner keeps  Equity capital limited
all the profits to owner’s personal
 Taxed once as wealth
personal income  Unlimited liability
 Difficult to sell
ownership interest

1-7
Partnership

 Advantages  Disadvantages
 Two or more owners  Unlimited liability
 More capital available  General partnership
 Relatively easy to  Limited partnership
start  Partnership dissolves
 Income taxed once as when one partner dies
personal income or wishes to sell
 Difficult to transfer
ownership

1-8
Corporation

 Advantages  Disadvantages
 Limited liability  Separation of
 Unlimited life ownership and
 Separation of management
ownership and  Double taxation
management (income taxed at the
 Transfer of ownership corporate rate and
is easy then dividends taxed
at the personal rate)
 Easier to raise capital

1-9
Goal Of Financial Management

 What should be the goal of a corporation?


 Maximize profit?
 Minimize costs?
 Maximize market share?
 Maximize the current value of the company’s
stock?
 Does this mean we should do anything
and everything to maximize owner wealth?

1-10
The Agency Problem

 Agency relationship
 Principal hires an agent to represent his/her
interests
 Stockholders (principals) hire managers
(agents) to run the company
 Agency problem
 Conflict of interest between principal and agent
 Management goals and agency costs

1-11
Managing Managers

 Managerial compensation
 Incentives can be used to align management
and stockholder interests
 The incentives need to be structured carefully
to make sure that they achieve their goal
 Corporate control
 The threat of a takeover may result in better
management
 Other stakeholders

1-12
Work the Web Example

 The Internet provides a wealth of


information about individual companies
 One excellent site is finance.yahoo.com
 Click on the web surfer to go to the site,
choose a company and see what
information you can find!

1-13
Financial Markets

 Cash flows to the firm


 Primary vs. secondary markets
 Dealer vs. auction markets
 Listed vs. over-the-counter securities
 NYSE
 NASDAQ

1-14
Quick Quiz

 What are the three types of financial management


decisions and what questions are they designed
to answer?
 What are the three major forms of business
organization?
 What is the goal of financial management?
 What are agency problems and why do they exist
within a corporation?
 What is the difference between a primary market
and a secondary market?
1-15
1
End of Chapter

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

You might also like