Chapter 1
Fundamentals of
Corporate Finance
Fourth Edition
The Firm and The
Financial Manager
Slides by
Matthew Will
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 2
Topics Covered
Organizing a Business
The Role of The Financial Manager
Who Is The Financial Manager?
Goals of the Corporation
CEO Pay
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 3
Organizing a Business
Types of Business Organizations
Sole
Proprietorships
Partnerships
Corporation
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 4
Organizing a Business
Sole
Partnership
Proprietorship
Corporation
Who owns the
business?
The manager
Partners
Shareholders
Are managers
and owners
separate?
What is the
owner’s
liability?
Are the owner
& business
taxed
separately?
No
No
Usually
Unlimited
Unlimited
Limited
No
No
Yes
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 5
Corporate Structure
Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships
Limited Liability
Corporations
Corporate tax on profits +
Personal tax on dividends
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 6
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
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 7
The Role of The Financial Manager
Capital Budgeting Decision
Buy
real assets that are worth more than they
cost
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 8
The Role of The Financial Manager
“Capital
Irwin/McGraw Hill
Budgeting”
Tangible Assets
Nontangible Assets
Euro Disney
Gillette’s Mach3 Razor
@ $2 billion
@ $300 million
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 9
Who is The Financial Manager?
Chief Financial Officer
Treasurer
Irwin/McGraw Hill
Controller
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 10
Careers in Finance
Career
Commercial Banking
Loan Officer
Department Manager
Annual Salary
$ 60,000 +
$ 100,000 +
Corporate Finance
Financial Analyst
Credit Manager
Chief Financial Officer
$ 38 - 47,000
$ 30 - 63,000
$ 232 - 295,000
Investment Banking (bulge bracket)
First Year Analyst
First Year Associate
Assistant Vice President
Director/Principal
Managing Director/Partner
Department Head
$ 30 - 110,000
$ 125 - 235,000
$ 200 - 600,000
$ 300k - 1.2 mil
$ 400k - 20 mil
$ 750k - 70 mil
Money Management
Portfolio Manager
Bank Trust Department
$ 500,000 +
$ 100,000 +
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 11
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
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 12
Goals of The Corporation
Ethics & Management Objectives
 Does value maximization justify unethical behavior?
 Enron example
 WorldCom example
 Arthur Andersen example
 Salomon Brothers example
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 13
Goals of The Corporation
Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Auditors
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 14
CEO Pay
CEO Compensation 2001 ($ millions)
CEO Name
Philip Condit
Sanford Weill
Gordon Bethune
Michael Dell
Michael Eisner
Lee Raymond
Ray Irani
Robert Ulrich
David Bernaner
Donald Graham
Steven Rogel
Company
Boeing
Citigroup
Continental Airlines
Dell Computer
Walt Disney
Exxon Mobil
Occidental Petroleum
Target
Walgreen
Washington Post
Weyerhauser
Total
Earnings from
Earnings Stock Options
2.90
0.00
34.60
15.90
4.70
0.00
201.30
198.70
1.00
0.00
32.70
24.30
10.90
1.70
6.60
2.20
2.20
0.79
1.10
0.00
2.10
0.00
source: www.forbes.com/ceos
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved
1- 15
Web Resources
Click to access web sites
Internet connection required
www.financewise.com
www.businessweek.com
www.fortune.com
www.fei.org
www.fma.org/Student/studentindex.htm
www.wetfeet.com/asp/home.asp
www.corpgov.net
www.careers-in-finance.com
Irwin/McGraw Hill
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved