Fundamentals of Corporate Finance

Fifth Edition

Chapter 1
The Corporation and The Financial Manager

Slides by Matthew Will

McGraw-Hill/Irwin

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

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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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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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The Role of The Financial Manager

Capital

Budgeting

Tangible Assets Toyota in Texas @ $800 million

Nontangible Assets Gillettes Mach3 Razor @ $300 million

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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

mix of long term debt and equity financing.

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The Role of The Financial Manager

(2) (1)

Firm's operations

Financial Manager
(3)

(4a)

Investors

Real assets

(4b)
(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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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 Proprietorship
Who owns the business? Are managers and owners separate? What is the owners liability? Are the owner & business taxed separately?
McGraw-Hill/Irwin

Corporation
Shareholders Usually

The manager No

Partners No

Unlimited

Unlimited

Limited

No

No

Yes

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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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Who is The Financial Manager?

Chief Financial Officer

Treasurer

Controller

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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

Ethics & Management Objectives
Does value maximization justify unethical behavior? Enron example WorldCom example AIG example

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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
Career Commercial Banking Loan Officer Department Manager Corporate Finance Financial Analyst Credit Manager Chief Financial Officer Investment Banking (bulge bracket) First Year Analyst First Year Associate Assistant Vice President Director/Principal Managing Director/Partner Department Head Money Management Portfolio Manager Bank Trust Department Annual Salary $ 60,000 + $ 100,000 +

$ 38 - 47,000 $ 30 - 63,000 $ 232 - 295,000

$ 60 - 110,000 $ 125 - 235,000 $ 200 - 600,000 $ 300k - 1.2 mil $ 400k - 20 mil $ 750k - 70 mil

$ 500,000 + $ 100,000 +

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Careers in Finance

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