Instructor’s Manual
Principles of Corporate Finance, 8/e
Richard A. Brealey, Stewart C. Myers, Franklin Allen
Copyright 2007 – The McGraw-Hill Companies
CHAPTER 1
FINANCE AND THE FINANCIAL MANAGER
OVERVIEW
The opening chapter provides the students with an overview of the field of finance and a brief overview
of the book. The chapter briefly explains the role of corporations, financial managers and financial
markets in the financial decision making process. Generally, there are two types of financial decisions
that are made in a corporation: investment decisions and financing decisions. In order to make these
decisions a financial manager not only uses input from the corporation, but also from financial markets.
Related topics, such as different forms of organizing a business, the role of the financial manager, and the
importance of well-functioning financial markets in the financial decision making process, are discussed.
LEARNING OBJECTIVES



The advantages and disadvantages of organizing a business as a corporation.
The role of the financial manager in a corporation.
Principal-agent problems, agency costs and information asymmetries.
CHAPTER OUTLINE
What is a corporation?
Several different forms of organizations are described, including sole proprietorships, partnerships, and
corporations. The advantages and disadvantages of organizing a business as a corporation are also
explained.
The role of the financial manager
The financial manager is pictured as an intermediary between capital markets and the firm’s operations,
responsible both for financing decisions (decisions that involve raising money) and investment decisions
(decisions that involve spending money). The financial manager must understand how risky, long-lived
assets are valued in order to make decisions that benefit the shareholders or owners.
Who is the financial manager?
This section identifies the “financial manager” as the chief financial officer (CFO), treasurer and/or
controller, and sketches his or her duties.
Separation of ownership and management
The separation of ownership and management is an important characteristic of the corporation. It has its
share of advantages and disadvantages. Principal-agent problems and agency costs are also discussed.
Information asymmetries are major barriers to resolving principal-agent problems.
1
Instructor’s Manual
Principles of Corporate Finance, 8/e
Richard A. Brealey, Stewart C. Myers, Franklin Allen
Copyright 2007 – The McGraw-Hill Companies
Topics covered in this book
An overview of the topics covered in the book is provided.
TEACHING TIPS FOR POWER POINT SLIDES
Slide 1
Teaching Tip: Provide students with the “big picture.” It is important for students to have an overview of
finance including the scope, concerns, and issues of corporate finance. Briefly explain how technology is
having a major influence on finance. For example, the rapid development of the field of E-Finance in
recent years.
Slide 2
Teaching Tip: Relate these topics to the learning objectives of this chapter. Provide examples of a few
large corporations in the US and abroad. For example, GE and Microsoft in the U.S.A, and oversees firms
like Sony and Nestle.
Slide 3
Teaching Tip: Briefly explain the three forms of business organizations: Sole Proprietorship, Partnership
and the Corporation. Mention that the financial principles that we study in this course are also applicable
to sole proprietorships and partnerships. Explain the advantages and disadvantages of a corporation.
Emphasize limited liability & separation of ownership and management. Point out that shareholders are
the owners of the corporation. Explain how a corporation is a dynamic entity.
Slide 4
Teaching Tip: Explain the critical role of the financial manager in obtaining funds from financial markets
to fulfill the needs of the firm. Be certain to provide the big picture. Explain the cash flows shown in the
slide. Explain how cash is generated from operations. Explain how this slide helps in understanding the
role of the financial manager. The financial manager must learn to value real and financial assets. The
financial manager must understand how financial markets work, for it is there that value is ultimately
determined. Also explain the cash flow cycle as given in the diagram.
Slide 5
Teaching Tip: Briefly explain the role of the chief financial officer [CFO]. The financial manager is
expected to maximize the value of the firm to the shareholders. [This is again explained in Chapter 2.]
Briefly explain the roles of the treasurer and the controller. Explain the difference between real assets and
financial assets. Briefly explain the following terms: capital markets, financial markets, capital budgeting,
and financing.
Slide 6
Teaching Tip: Briefly explain the important roles played by the chief financial officer (CFO), the
treasurer and the controller as given in Figure 1-2.
2
Instructor’s Manual
Principles of Corporate Finance, 8/e
Richard A. Brealey, Stewart C. Myers, Franklin Allen
Copyright 2007 – The McGraw-Hill Companies
Slide 7
Teaching Tip: Explain the concept of separation of ownership and management. Discuss advantages and
disadvantages this has, the potential for conflict of interests between shareholders and managers. Explain
agency costs, principal-agent problems and information asymmetries.
KEY TERMS AND CONCEPTS
Sole proprietorship, unlimited liability, partnership, limited partnership, corporation, limited liability,
board of directors, separation of ownership and management, chief financial officer (CFO), treasurer,
controller, principal-agent problems, agency costs, information asymmetry.
CHALLENGE AREAS
Separation of ownership and management
Agency costs
ADDITIONAL REFERENCES
Allen, Franklin, James McAndrews, and Philip Strahan. “E-Finance: An Introduction” Working Paper 0136, Financial Institutions Center, The Wharton School, University of Pennsylvania. October 2001.
Core, J.E., W.R. Guay, and D.F. Larcker. “Executive Equity Compensation and Incentives: A Survey,”
Federal Reserve Bank of New York Economic Policy Review, 9 (April 2003), PP 27-50.
Mackie-Mason, J.K., and R.H. Gordon. “How Much Do Taxes Discourage Incorporation?” Journal of
Finance, (June 1997).
Rappaport, A. “New thinking on how to link executive pay with performance.” Harvard Business
Review, March-April 1999, 91-104.
WEB LINKS
www.mhhe.com/bma8e
www.microsoft.com
www.sony.net
www.nestle.com
www.ge.com
www.gm.com
www.bofa.com
www.ft.com
www.economist.com
www.businessweek.com
3
Instructor’s Manual
Principles of Corporate Finance, 8/e
Richard A. Brealey, Stewart C. Myers, Franklin Allen
Copyright 2007 – The McGraw-Hill Companies
www.forbes.com
www.fortune.com/fortune
www.cfo.com
www.ny.frb.org/research/epr/03v09n1/0304core.pdf
ADDITIONAL INTERNET ACTIVITIES
Visit fic.wharton.upenn.edu/fic/ and read the article “E-Finance: An Introduction.”
4