Fundamentals of corporate finance 5e mcgraw chapter 01
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Fundamentals of
Corporate
Finance
Fifth Edition
Slides by
Matthew Will
McGraw-Hill/Irwin
Chapter 1
The Corporation and
The Financial Manager
1- 2
Topics Covered
Investment and Financing Decisions
What is Corporation?
Who Is The Financial Manager?
Goals of the Corporation
Careers in Finance
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 3
The Role of The Financial Manager
Capital Budgeting Decision
Decision
to invest in tangible or intangible
assets.
…also called the Investment Decision
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 4
The Role of The Financial Manager
“Capital
McGraw-Hill/Irwin
Budgeting”
Tangible Assets
Nontangible Assets
Toyota in Texas
Gillette’s Mach3 Razor
@ $800 million
@ $300 million
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 5
The Role of The Financial Manager
Financing Decision
Raising
money that the firm needs for its
investments and operations.
Capital Structure
The
McGraw-Hill/Irwin
mix of long term debt and equity financing.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 6
The Role of The Financial Manager
(2)
Firm's
operations
Real assets
(1)
Financial
Manager
(4a)
Investors
(4b)
(3)
(1) Cash raised from investors
(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 7
What is a Corporation?
Types of Corporations
Public
Companies
Private Corporations
Limited Liability Corporations (LLC)
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 8
Organizing a Business
Types of Business Organizations
Sole
Proprietorships
Partnerships
Corporations
Limited Liability Partnerships
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 9
Organizing a Business
Sole
Partnership Corporation
Proprietorship
Who owns the
business?
The manager
Partners
Shareholders
Are managers
and owners
separate?
What is the
owner’s
liability?
Are the owner
& business
taxed
separately?
No
No
Usually
Unlimited
Unlimited
Limited
No
No
Y es
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 10
Corporate Structure
Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships
Limited Liability
Corporations
Corporate tax on profits +
Personal tax on dividends
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 11
Who is The Financial Manager?
Chief Financial Officer
Treasurer
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Controller
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1- 12
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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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 13
Goals of The Corporation
Ethics & Management Objectives
Does value maximization justify unethical behavior?
Enron example
WorldCom example
AIG example
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1- 14
Goals of The Corporation
Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Auditors
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Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 15
Careers in Finance
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
1- 16
Careers in Finance
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights
