Welcome
and
Chapter 1
Thomas Holloway
Groups of about 4
• Talk about:
− How was your long weekend?
− Questions about the course?
− Feelings and anticipation about the year in
general
− Feelings and anticipation about finance this year
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Key Concepts and Skills
• The types of financial management decisions and
the role of the financial manager
• The financial implications of the different forms of
business organization
• The goal of financial management
• Understand the conflicts of interest that can arise
between owners and managers
• Understand the various types of financial markets
and financial institutions
• Understand current trends in Canadian financial
markets
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Chapter Outline
1.1
1.2
1.3
1.4
Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the
Corporation
1.5 Financial Markets and the Corporation
1.6 Financial Institutions
1.7 Trends in Financial Markets and Financial
Management
1.8 Outline of the Text
Summary and Conclusions
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1.1 Corporate Finance and the
Financial Manager
• What Is Corporate Finance?
No matter what type of firm you started, you would
have to answer the following three questions in some
form or another:
− 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?
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1.1 Corporate Finance and the
Financial Manager
• Financial managers try to answer some or all these
questions.
• The top financial manager within a firm is usually the
Chief Financial Officer (CFO).
− Treasurer oversees cash management, capital
expenditures and financial planning.
− Controller oversees taxes, cost accounting,
financial accounting and data processing.
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1.1 Corporate Finance and the
Financial Manager
Financial Management Decisions
1. Capital budgeting
− What long-term investments or projects should the
business take on?
2. Capital structure
− How should we pay for our assets?
− Should we use debt or equity?
3. Working capital management
− How do we manage the day-to-day finances of the
firm?
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Balance sheet model of the firm
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1.2 Forms of Business Organization
Three major forms in Canada:
− Sole proprietorship
− Partnership
− Corporation
• In other countries, corporations are also called
joint stock companies, public limited
companies and limited liability companies.
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1.2 Forms of Business Organization
• Sole Proprietorship
A business owned by a single individual.
− Advantages
• Easiest to start
• Least regulated
• Single owner keeps all the profits
• Taxed once as personal income
− Disadvantages
• Unlimited liability
• Limited to life of owner
• Equity capital limited to owner’s personal wealth
• Difficult to sell ownership interest
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1.2 Forms of Business Organization
• Partnership
A business formed by two or more co-owners.
− Advantages
• Two or more owners
• More human and financial capital available
• Relatively easy to start
• Income taxed once as personal income
− Disadvantages
• Unlimited liability
- General partnership
- Limited partnership
• Partnership dissolves when one partner dies or wishes to
sell
• Difficult to transfer ownership
• Possible disagreements between partners
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1.2 Forms of Business Organization
• Corporation
A business created as a distinct legal entity owned by one or
more individuals or entities.
− Advantages
• Limited liability
• Unlimited life
• Separation of ownership and management
• Transfer of ownership is easy
• Easier to raise capital
− Disadvantages
• Separation of ownership and management
• Double taxation (income is taxed at the corporate rate
and then dividends are taxed at the personal rate)
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1.2 Forms of Business Organization
• Income Trust
Business income trusts (also called income funds)
hold the debt and equity of an underlying business
and distribute the income generated to unit holders.
− Advantages
• Not subject to corporate income tax and
income is typically taxed in hands of unit
holders.
• Investors view income trusts as more tax
efficient.
− Disadvantages
• Income trusts are not corporations and so, do
not have the same advantages as one.
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1.2 Forms of Business Organization
• Co-operative (Co-op)
A co-operative is an enterprise that is equally owned by its
members, who share the benefits of co-operation based
on how much they use the co-operative’s services.
− Advantages
• Equally owned by its members
• Helps its members compete more effectively while
creating social capital
− Disadvantages
• Potentially difficult to reach decisions based on
premise of equal ownership by members
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1.2 Forms of Business Organization
Work the Web Example
• The Internet can help people to get information
about how to start a new business
• One excellent site is www.canadabusiness.ca
• Click on the web surfer to go to the site and see
what information you can find!
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1.3 The 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 company’s
stock?
• Does this mean we should do anything and
everything to maximize owner wealth?
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1.3 The Goal of Financial Management
• Three equivalent goals of financial management:
− Maximize shareholder wealth
− Maximize share price
− Maximize firm value
--- Value and Values ---
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1.4 The Agency Problem and Control
of the Corporation
• Agency Relationship
− Principal hires an agent to represent their interests.
− Stockholders (principals) hire managers (agents) to
run the company.
• Agency Problem
− Conflicts of interest can exist between the principal
and the agent.
• Agency Costs
− Direct agency costs
− Indirect agency costs
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1.4 The Agency Problem and Control
of the Corporation
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.
• Conflicts with other stakeholders
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1.4 The Agency Problem and Control
of the Corporation
Social Responsibility and Ethical Investing
• Investors are increasingly demanding that
corporations behave responsibly.
• Issues include how a corporation treats the
community in which it operates, their customers,
corporate governance, their employees, the
environment and human rights.
• Controversial business activities include alcohol,
gaming, genetic engineering, nuclear power,
pornography, tobacco, and weapons.
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1.5 Financial Markets and Corporations
• Cash flows to and from the firm
• Money vs. capital markets
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1.5 Financial Markets And Corporations
Figure 1.4 Cash flows between the firm and the financial markets
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1.6 Financial Institutions
• Financial institutions act as intermediaries
between suppliers and users of funds.
• Commonly called banks or investment dealers
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1.7 Trends in Financial Markets
and Management
•
•
•
•
•
•
•
•
Financial Engineering
Derivative Securities
Advances in Technology - i.e., E-business
Deregulation
Corporate Governance Reform
ESG
Cryptocurrency and Central Bank Digital Currency
Fintech
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Outline of Course
Part 1: Overview of Corporate Finance
Part 2: Financial Statements and Long-Term
Financial Planning
Part 3: Valuation of Future Cash Flows
Part 4: Capital Budgeting
Part 5: Risk and Return
Part 6: Cost of Capital and Long-Term Financial
Policy
Part 7: Short-Term Financial Planning and
Management
Part 8: Topics in Corporate Finance
Part 9: Derivative Securities and Corporate Finance
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Summary and Conclusions
• You should know:
− The advantages and disadvantages between a
sole proprietorship, partnership and corporation.
− The primary goal of the firm.
− What an agency relationship and agency cost are.
− What ethical investing is.
− The role of financial markets.
− The role of financial institutions.
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Quick Quiz
• What are the three types of financial management
decisions and what questions are they designed to
answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
• What are agency problems and why do they exist
within a corporation?
• What is the difference between a primary market and
a secondary market?
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