Chapter 1 introduction to corporate finance





McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts and Skills
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


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

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
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


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 
!
1-2
Chapter Outline
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"
•
#$
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%&"

•
%'(
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"!
1-3
Corporate Finance
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)*+
–
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?
1-4
Financial Manager
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
*
•
%

$,-$.
–
Treasurer – oversees cash management, credit
management, capital expenditures, and
financial planning

–
Controller – oversees taxes, cost accounting,
financial accounting and data processing
1-5
Financial Management
Decisions
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
–
What long-term investments or projects
should the business take on?
•
/0 (
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Should we use debt or equity?
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How should we pay for our assets?
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Cash Dividend or Share Repurchase
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1!
–
How do we manage the day-to-day
finances of the firm?
1-6
Forms of Business
Organization
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%2)
–

Sole Proprietorship
–
Partnership
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General
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Limited
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Corporation
•
C-Corp
•
S-Corp
•
Limited Liability Company
1-7
Sole Proprietorship
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' 
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Easiest to start
–
Least regulated
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Single owner keeps
all the profits
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Taxed once as
personal income
•

0 
–
Limited to life of
owner
–
Equity capital
limited to owner’s
personal wealth
–
Unlimited liability
–
Difficult to sell
ownership interest
1-8
Partnership
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' 
–
Two or more
owners
–
More capital
available
–
Relatively easy to
start
–
Income taxed once
as personal income
•

0 
–
Unlimited liability
•
General partnership
•
Limited partnership
–
Partnership
dissolves when one
partner dies or
wishes to sell
–
Difficult to transfer
ownership
1-9
Corporation
•
' 
–
Limited liability
–
Unlimited life
–
Separation of
ownership and
management
–
Transfer of
ownership is easy

–
Easier to raise
capital
•
0 
–
Separation of
ownership and
management
–
Double taxation
(income taxed at
the corporate rate
and then dividends
taxed at the
personal rate)
1-10
Goal of Financial
Management
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1
3
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Maximize profit?
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Minimize costs?
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Maximize market price per share?
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Maximize the current value of the company’s

stock?
•
0
 
43
1-11
The Agency Problem
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'
–
Principal (Stockholders) hires agents
(Boards) to represent his/her interests
–
Stockholders (& Boards) hire managers
(agents) to run the company
•
'
–
Conflict of interest between principal
and agent
•
"
1-12
Managing Managers
•
56
•
"
–
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
•

–
The threat of a takeover may result in better
management
•
$!
1-13
Work the Web Example
•
% 
 

•
$4
77
•
!
8
9
1-14
Financial Markets
•
( 
•
( 7!

–
Dealer vs. auction markets
–
Listed vs. over-the-counter securities
•
NYSE
•
NASDAQ
1-15
Quick Quiz
•
1

*3
•
12
3
•
1
3
•
1
43
•
1
!
!3
1-16
Ethics Issues
•


! 
3 
3
•
)
3
•

8!
3
•
)
 -778
".3
1-17
End of Chapter
1-18