Download Chapter 1: Goals and Governance of the Firm

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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
Copyright ©Copyright
2009 by The
McGraw-Hill
Companies, Inc.
All rights
reserved
© 2009
by The McGraw-Hill
Companies,
Inc.
All rights reserved
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Topics Covered
 Investment and Financing Decisions
 What is a Corporation?
 Who Is The Financial Manager?
 Goals of the Corporation
 Careers in Finance
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The Role of The Financial Manager
 Capital Budgeting Decision

Decision to invest in tangible or intangible
assets.
 …also called the Investment Decision
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The Role of The Financial Manager

“Capital Budgeting”
Tangible Assets
Intangible Assets
Toyota Plants
Gillette’s Fusion Razor
@ $3 billion new debt
@ $200 million
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The Role of The Financial Manager
 Financing Decision

The form and amount of financing of a firm’s
investments.
 Capital Structure

The mix of long term debt and equity financing.
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The Role of The Financial Manager
(2)
Firm's
operations
Real assets
(1)
Financial
Manager
(4a)
(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
Investors
Investment
assets
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The Role of The Financial Manager
 Real Assets

Assets used to produce goods and services.
 Financial Assets

Financial claims to the income generated by the
firm’s real assets.
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What is a Corporation?
 Corporation

A business organized as a separate legal entity
owned by stockholders.
 Types of Corporations
Public Companies
 Private Corporations
 Limited Liability Corporations (LLC)

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Organizing a Business
 Types of Business Organizations
Sole Proprietorships
 Partnerships
 Corporations
 Limited Liability Options

• Limited Liability Partnerships
• Limited Liability Corporations
• Professional Corporations
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Organizing a Business
Sole
Proprietorship
Partnership
Corporation
Who owns the
business?
The manager
Partners
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
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Corporate Structure
Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships
Limited Liability
Corporations
Corporate tax on profits +
Personal tax on dividends
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Who is The Financial Manager?
Chief Financial Officer
Treasurer
Controller
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Who is The Financial Manager?
 Chief Financial Officer (CFO)

Oversees the treasurer and controller and sets
overall financial strategy.
 Treasurer

Responsible for financing, cash management, and
relationships with banks and other financial
institutions.
 Controller

Responsible for budgeting, accounting, and taxes.
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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
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Goals of The Corporation
Ethics & Management Objectives




Does value maximization justify unethical behavior?
Enron example
WorldCom example
Putnam example
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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
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Agency Problem
 Agency Problems

Managers, acting as agents for stockholders, may
act in their own interests rather than maximizing
value.
 Stakeholder

Anyone with a financial interest in the firm.
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Goals of The Corporation
Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Legal and Regulatory Requirements
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Careers in Finance
Career
Commercial Banking
Loan Officer
Department Manager
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
$ 500k - 2 mil
$ 600k - 30 mil
$ 1 mil - 70 mil
Money Management
Portfolio Manager
Bank Trust Department
$ 500,000 +
$ 60k - 150,000
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Careers in Finance
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