Chapter 1 Topics Covered
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Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 1 1- 1 Fundamentals of Corporate Finance Sixth Edition Chapter 1 Goals and Governance of the Firm Richard A. Brealey Stewart C. Myers Alan J. Marcus Slides by Matthew Will McGraw McGraw Hill/Irwin Hill/Irwin 1- 2 Copyright ©Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Topics Covered Investment and Financing Decisions p What is a Corporation? Who Is The Financial Manager? Goals of the Corporation Careers in Finance Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 2 1- 3 The Role of The Financial Manager Capital Budgeting Decision Î Decision D i i to t invest i t in i tangible t ibl or intangible i t ibl assets. …also called the Investment Decision 1- 4 The Role of The Financial Manager Î “Capital Budgeting” Tangible Assets Intangible Assets Toyota Plants Gillette’s Fusion Razor @ $3 billion new debt @ $200 million Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 3 1- 5 The Role of The Financial Manager Financing Decision Î The form Th f andd amountt off financing fi i off a firm’s fi ’ investments. Capital Structure Î The mix of long g term debt and equity q y financing. g 1- 6 The Role of The Financial Manager (2) Firm's operations Real assets (1) Financial Manager (4a) (4b) (3) (timberland) (1) Cash raised from investors (2) Cash invested in firm Investors (stockholders/ debtholders save and invest in a closely held firm. (3) Cash generated by operations (timber harvest) (4a) Cash reinvested (4b) Cash returned to investors Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 4 1- 7 The Role of The Financial Manager Real Assets Î A t used Assets d tto produce d goods d andd services. i • Tangible – machines, buildings, land • Intangible – brand value, logistical support Financial Assets Î Financial claims to the income generated by the firm’s real assets. 1- 8 What is a Corporation? Corporation Î A business organized as a separate legal entity owned by stockholders. Types of Corporations Public Companies Î Private Pi Corporations C i Î Limited Liability Corporations (LLC) Î Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 5 1- 9 Organizing a Business Types of Business Organizations Sole Proprietorships Î Partnerships Î Corporations Î Limited Liability Options Î • Limited Liability Partnerships • Limited Liability Corporations • Professional Corporations 1- 10 Organizing a Business Sole Proprietorship Partnership Corporation Whoo owns W ow s thee business? Th manager The P Partners S kh ld Stockholders Are managers and owners separate? No No Usually What is the owner's liability? Unlimited Unlimited Limited Are the owner and business taxed separately? No No Yes Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 6 1- 11 Corporate Structure Sole Proprietorships Unlimited Liability Personal tax on profits Partnerships Limited Liability Corporations Corporate tax on profits + Personal tax on dividends 1- 12 Who is The Financial Manager? Chief Financial Officer Treasurer Controller Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 7 1- 13 Who is The Financial Manager? Chief Financial Officer (CFO) Î Oversees the treasurer and controller and sets overall financial strategy. Treasurer Î Responsible for financing, cash management, and relationships with banks and other financial institutions. Controller Î 1- 14 Responsible for budgeting, accounting, and taxes. 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 Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 8 1- 15 Goals of The Corporation Ethics & Management Objectives Does value maximization jjustifyy unethical behavior? Enron example WorldCom example Putnam example p 1- 16 Agency Problem Ownership vs. Management Difference in Information Stock prices and returns Issues of shares and other securities Dividends Financing Different Objectives Managers vs. stockholders Top mgmt vs. operating mgmt Stockholders vs. banks and lenders Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 9 1- 17 Agency Problem Agency Problems Î Managers, acting as agents for stockholders, may act in their own interests rather than maximizing value. Stakeholder Î 1- 18 Anyone with a financial interest in the firm. firm Goals of The Corporation Agency Problem Solutions p plans p 1 - Compensation 2 - Board of Directors 3 - Takeovers 4 - Specialist Monitoring 5 - Legal and Regulatory Requirements Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 10 1- 19 Careers in Finance Career Commercial Banking Loan Officer Department Manager 1- 20 Annual Salary $ 90,000 + $ 200,000 + Corporate Finance Financial Analyst Credit Manager Chief Financial Officer $ 61-78,000 $ 73-92,000 $ 222-367,000 Investment Banking (bulge bracket) First Year Analyst First Year Associate Assistant Vice President Director/Principal Managing Director/Partner Department Head $ 90-180,000 $ 200-350,000 $ 300-900,000 300 900,000 $ 500k - 2 mil $ 600k - 30 mil $ 1 mil - 70 mil Money Management Portfolio Manager Bank Trust Department $ 500,000 + $ 60k - 150,000 Careers in Finance Chapter 1, Finance 5040, Intro to Finance and Financial Mathematics, Page 11 1- 21 Web Resources