Principles of Finance – Fall 2012 (FIN 3403) Instructor: Nina Schmidt, Ph.D. OUTLINE: Welcome & Introduction Syllabus, Blackboard and Connect Chapter 1 0 1 Chapter 1 Introduction to Corporate Finance McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Outline • • • • • Financial Management The Agency Problem Forms of Business Organization Financial Markets Class Overview 3 Financial Management • Def of Finance: the study of money • The goal of the financial manager: maximize market share or profits? best: “optimize shareholder value” 4 Financial Management • The Three Main Decisions (Functions) of the financial manager: 1. Capital budgeting or investment decisions 2. Capital structure or financing decisions 3. Working capital management or day to day cash management decisions (note: we will focus on the corporate world) 5 Sample Organizational Chart 6 The Agency Problem • An agency relationship is also called a fiduciary relationship. In an agency relationship the represents the . • An agency problem exists when a exists between the agent and the principal. • The solution for the agency problem: tie management compensation to stock price performance • Corporate Scandals and Sarbanes Oxley Act 7 of 2002. Forms of Business Organization Sole Proprietorship Characteristics: Partnership (General or Limited) Corporation Life of Business Ability to Raise Cash Taxation Liability Transfer of Ownership 8 Forms of Business Organization • Two forms of business organization that take advantage of the benefits of a corporation but avoid double taxation: S-Corp and LLC. • Legal information can be found on legal websites, such as: www.nolo.com www.legalzoom.com 9 Financial Markets: Cash Flows between the Firm and the Financial Markets 10 Financial Markets • Primary vs. Secondary Markets • Secondary Markets: Dealer vs. Auction Markets - Dealer Market: No physical location (over the counter OTC) for example: NASDAQ - Auction Market: Physical location for example: NYSE, AMEX, CBOT 11 “NYSE in the Digital Age” Sarasota Herald Tribune, Feb 18th, 2007, Page D 1 Traders on the NYSE trading floor in November 2006. Traders on a crowded NYSE trading floor in November 1968 Class Overview: Principles of Finance Goal of Financial Manager: Optimize Shareholders’ Wealth Three Main Decisions Long Term Short Term Capital Budgeting Capital Structure Investing = Spending Money Financing = Getting Money Ch 1: Introduction Ch 2 & 3: Financial Statements, Ratios, Cash Flows Ch 5 & 6: Time Value of Money → Exam I Working Capital Management Ch 7: Bond Valuation Ch 8: Stock Valuation Ch 9: NPV and other Investment Criteria Ch 10: Making Capital Investment Decisions Ch 12: Capital Market History Ch 13: Risk, Return and the Capital Asset Pricing Model Ch 14: Cost of Capital & WACC Ch 16: Financial Leverage and Capital Structure → Exam II → Cumulative Final Exam 13