1- 1

Fundamentals of
Corporate
Finance

Chapter 1
The Corporation and The
Financial Manager

Fifth Edition

Slides by
Matthew Will

McGraw-Hill/Irwin
McGraw-Hill/Irwin

Copyright Copyright
2007 by The
2007
McGraw-Hill
by The McGraw-Hill
Companies, Companies,
Inc. All rights
Inc. All rights

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Topics Covered
Investment and Financing Decisions
What is Corporation?
Who Is The Financial Manager?
Goals of the Corporation
Careers in Finance

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Copyright 2007 by The McGraw-Hill Companies, Inc. All rights

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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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Copyright 2007 by The McGraw-Hill Companies, Inc. All rights

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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

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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

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Copyright 2007 by The McGraw-Hill Companies, Inc. All rights

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What is a Corporation?
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 Partnerships

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Organizing a Business
Sole
Partnership Corporation
Proprietorship
Who owns the
business?

The manager

Partners

Shareholders

Are managers
and owners
separate?
What is the
owners
liability?
Are the owner
& business
taxed
separately?

No

No

Usually

Unlimited

Unlimited

Limited

No

No

Y es

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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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1- 10

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

Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Auditors

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Careers in Finance

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1- 13

Careers in Finance

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Copyright 2007 by The McGraw-Hill Companies, Inc. All rights