1

Introduction To Corporate Finance

0

Key Concepts and Skills

Know

the basic types of financial management decisions and the role of the financial manager Know the financial implications of the different forms of business organization Know the goal of financial management Understand the conflicts of interest that can arise between owners and managers Understand the various types of financial markets
1

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

Corporate Finance
Some

important questions that are answered using finance

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?

Finance as Performance Metric

Lenders Stock Analysts

Rating Agencies Rating Agencies

Finance as Performance Metric

Tax and Government Regulators Management Review

Shareholders Shareholders

Finance as Performance Metric

Suppliers

Customers Employees Employees

6

Financial Manager

Financial managers try to answer some or all of these questions The top financial manager within a firm is usually the Chief Financial Officer (CFO)

Treasurer oversees cash management, credit management, capital expenditures, and financial planning Controller oversees taxes, cost accounting, financial accounting and data processing

Finance
Integrated Business Partner Advisor Commentator Caretaker Scorekeeper

Scorekeeper:
One who keeps track.

Caretaker:
One who takes care of something

Commentator:
One who reports and analyzes.

Advisor:
One who is empowered to give advice.

Integrated Business Partner:

Time
Source: PwC

In the modern business relationship, each partner has something of value to offer and each needs something. Without acting together, neither will succeed. 8

CEO Organization Chart

CEO

General Counsel

CFO

CIO

Production/ Manufacturing

Sales/ Marketing

Human Resources

Investor Relations *

Organization Charts always vary, depending on industry, management style, company size, etc.
9

CFO Organization Chart

CFO

Controller

Tax

Treasury

Financial Planning & Analysis

Internal Audits*

10

Treasury Organization Chart

Treasurer

Investing & Borrowing

Foreign Currencies

Banking/ Cash Mgmt

Insurance

Credit

11

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 of the firm?

12

Financial Management Decisions

Capital budgeting

What long-term investments or projects should the business take on? How should we pay for our assets? Should we use debt or equity? How do we manage the dayto-day finances of the firm?

Capital structure

A s s e t s

L I a b s

Working capital management

Equity

13

Forms of Business Organization

Three

major forms in the United States

Sole proprietorship Partnership

General Limited

Corporation
S-Corp Limited liability company

14

Sole Proprietorship

Advantages

Disadvantages

Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income

Limited to life of owner Equity capital limited to owners personal wealth Unlimited liability Difficult to sell ownership interest

15

Partnership

Advantages

Disadvantages

Two or more owners More capital available Relatively easy to start Income taxed once as personal income

Unlimited liability
General partnership Limited partnership

Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership

16

Corporation

Advantages

Disadvantages

Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital

Separation of ownership and management Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)

17

Goal Of Financial Management

What

should be the goal of a corporation?

Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the companys stock?

Does

this mean we should do anything and everything to maximize owner wealth?

18

Goal Of Financial Management

What should be the goal of a corporation?

Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the companys stock?

Short term or long term? Profits or cash flow?

Does this mean we should do anything and everything to maximize owner wealth?
19

Goal Of Financial Management

What should be the goal of a corporation?

Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the companys stock?

Can quickly reduce costs by cutting capital spending and R&D, and by laying off people.

Does this mean we should do anything and everything to maximize owner wealth?
20

Goal Of Financial Management

What should be the goal of a corporation?

Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the companys stock?

Buying market share by selling at a loss

Does this mean we should do anything and everything to maximize owner wealth?
21

Goal Of Financial Management

What should be the goal of a corporation?

Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the companys stock?

What of other constituents besides the stockholders?

Does this mean we should do anything and everything to maximize owner wealth?
22

The Agency Problem

Agency

relationship

Principal hires an agent to represent his/her interest Stockholders (principals) hire managers (agents) to run the company

Agency

problem

Conflict of interest between principal and agent

Management

goals and agency costs

23

The Agency Problem

agency costs the purchase of something for management that cant be justified from a risk-return standpoint, monitoring costs. Indirect agency costs managements tendency to forgo risky or expensive projects that could be justified from a riskreturn standpoint.
Direct
24

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

Stakeholders

and their sometimes conflicting agenda

25

Work the Web Example

The Internet provides a wealth of information about individual companies See Blackboard for a sampling of the web sites that provide financial and market intelligence

26

Capital Markets

27

Financial Markets
Cash

flows to the firm Primary vs. secondary markets

Dealer vs. auction markets Listed vs. over-the-counter securities

NYSE NASDAQ

28

Take Aways

The three types of financial management decisions and what questions are they designed to answer The three major forms of business organization The goal of financial management Agency problems and why do they exist within a corporation The difference between a primary market and a secondary market?

29

Business Finance

Questions ?

30