Chapter 1

Introduction to Corporate Finance

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Chapter
ChapterOutline
Outline
• Corporate Finance and the Financial
Manager

• Forms of Business Organization

• The Goal of Financial Management

• The Agency Problem and Control of the

Corporation
1-2

• Financial Markets and the Corporation

 Chapter
ChapterOutline
Outline
• Corporate Finance and the Financial
Manager

• Forms of Business Organization

• The Goal of Financial Management

• The Agency Problem and Control of the

Corporation
1-3

• Financial Markets and the Corporation

 Corporate Finance
What do you need to have in order to start a
business?

Money?
Ideas?

What do you need first?

1-4
 Corporate Finance
Some important questions that are answered
using finance:

1. What long-term investments should the

firm take on?

2. Where will we get the long-term

financing to pay for the investment?

3. How will we manage the everyday

financial activities of the firm?
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 Corporate Finance
What is the difference between the first two questions and
the third one?

Short term decisions versus Long term decision

1-6
 Financial Managers
Chief Financial Officer (CFO):The top
financial manager within a firm
(Giám đốc tài chính)

Treasurer: Oversees cash management,

credit management, capital expenditures, and
financial planning
(Giám đốc nguồn vốn)

Controller: Oversees taxes, cost accounting,

financial accounting and data processing (Kế
toán trưởng)

1-7
 Hypothetical Organization Chart
Board of Directors

Chairman of the Board and

Chief Executive Officer (CEO)

President and Chief

Operating Officer (COO)

Vice President and

Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager Credit Manager Tax Manager Cost Accounting

Capital Expenditures Financial Planning Financial Accounting Data Processing

1-8
 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
1-9 of the firm?
 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

1-10
 Forms of Business Organization in
the U.S.

Sole • Single Owner

Proprietorship

• General
Partnership • Limited

• C-Corporation
• S-Corporation
Corporation • Limited Liability Company
(LLC)
1-11
 Forms of Business Organization in
the U.S.

Sole • Single Owner

Proprietorship

• General
Partnership • Limited

• C-Corporation
Corporation • S-Corporation
• Limited Liability Company (LLC)
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 Sole Proprietorship
Advantages:

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

1-14
 Forms of Business Organization in
the U.S.

Sole • Single Owner

Proprietorship

• General
Partnership • Limited

• C-Corporation
Corporation • S-Corporation
• Limited Liability Company (LLC)
1-15
 Partnership
Advantages:

• Two or more owners

• More capital available
• Relatively easy to start
• Income taxed once as
personal income

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 Partnership
Disadvantages:
• Unlimited liability
General partnership
Limited partnership
• Partnership dissolves when
one partner dies or wishes to
sell
• Difficult to transfer
ownership
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 Corporation
Advantages:
• Limited liability
• Unlimited life
• Separation of ownership
and management
• Transfer of ownership is
easy
• Easier to raise capital
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 Corporation
Disadvantages:
• Separation of ownership
and management

• Double taxation (income

taxed at the corporate
rate and then dividends
taxed at the personal
rate)

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 Corporation
Close corporation=Privately held corporaion=private corporation
(Công ty cổ phần nội bộ)

Public corporation = Publicly held corporation

(Công ty cổ phần đại chúng)

Listed corporation Unlisted public corporation

(Công ty niêm yết) (Công ty đại chúng chưa niêm yết)

Official stock exchanges OTC (Over the counter market)

1-20
 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

1-21
 Goal of Financial Management
What should be the goal of a corporation?
Maximize profits?
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?

1-22
 Goal of Financial Management
In micro economics: Profit maximization.

Why “profit maximization” is not the primary goal in

financial management?
First, this objective is ambiguous: Which profit to
maximize?
Accouting profit; Economic profit; Long-term profit;
Short-term profit.
Second, this objective ignores the time value of money
Third, this objective ignores the relationship between risk
and return.
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Two most important principles in financial management

1st principle: Time value of money

Money changes value overtime.

2nd principle: Risk and return tradeoff.

The higher the risk, the higher the expected return.

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 Goal of Financial Management
Maximization of shareholder wealth.

Shareholder wealth: Example

1. Jeff Bezos
Net Worth: $107.3 billion (2019).
 
Founder: Amazon (AMZN)

25
 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

1-26
 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
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 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
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Other stakeholders
 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!

1-29
 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

1-30
 Financial Markets
Cash flows to the firm
Primary vs. secondary markets
Dealer vs. auction markets
Listed vs. over-the-counter securities
NYSE
NASDAQ

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 Figure 1 Flows of Funds Through the
Financial System

2-32 © 2016 Pearson Education, Inc. All rights reserved.

1-33

Financial Markets

Stocks and
Investors
Bonds
Firms securities
Money Bob Sue
money

Primary Market
Secondary
Market

2-33 © 2016 Pearson Education, Inc. All rights reserved.

 Ethics Issues
 Is it ethical for tobacco companies to sell a product that is known
to be addictive and a danger to the health of the user? Is it
relevant that the product is legal?

 Should boards of directors consider only price when faced with a

buyout offer?

 Is it ethical to concentrate only on shareholder wealth, or should

stakeholders as a whole be considered?

 Should firms be penalized for attempting to improve returns by

stifling competition (e.g., Microsoft)?
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 Terminology

• CFO (Chief Financial Officer)

• Sole Proprietorship
• Partnership
• C-, S-, and LLC Corporations
• “Agency” Problem

1-35
 Key Concepts and Skills

• Role of the financial manager

• Corporation classifications
• Goal of financial management
• Potential conflicts between
financial managers and
shareholders

1-36
 What are the most
important topics of this
chapter?
1. The CFO’s role in a corporation.

2. Why does the corporation

classification matter?

3. Corporate manager’s possible

conflicting goal with the
owners of the company.

1-37