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Chapter Approach

Chapter 1 Firm Goals/Governance Road to success with

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McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Fundamentals of Corporate

Finance

Sixth Edition

Richard A. Brealey

Stewart C. Myers

Alan J. Marcus

Slides by

Matthew Will

Chapter 1

McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved

Goals and Governance of the Firm

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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

Toyota Plants

@ $3 billion new debt

Intangible Assets

Gillette’s Fusion Razor

@ $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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Financial

Manager

Firm's

operations Investors

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations (timber harvest)

(3)

(4a) Cash reinvested

(4a)

(4b) Cash returned to investors

(4b)

The Role of The Financial Manager

Real assets

(timberland)

(stockholders/ debtholders save and invest in a closely held firm.

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The Role of The Financial Manager

Real Assets Assets used to produce goods and services.

• Tangible – machines, buildings, land

• Intangible – brand value, logistical support

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

Corporations

Partnerships

Limited Liability

Corporate tax on profits +

Personal tax on dividends

Unlimited Liability

Personal tax on profits

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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

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

Ownership vs. Management

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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 FinanceCareer Annual SalaryCommercial Banking

Loan Officer $ 90,000 +Department Manager $ 200,000 +

Corporate FinanceFinancial Analyst $ 61-78,000Credit Manager $ 73-92,000Chief Financial Officer $ 222-367,000

Investment Banking (bulge bracket)First Year Analyst $ 90-180,000First Year Associate $ 200-350,000Assistant Vice President $ 300-900,000Director/Principal $ 500k - 2 milManaging Director/Partner $ 600k - 30 milDepartment Head $ 1 mil - 70 mil

Money ManagementPortfolio Manager $ 500,000 +Bank Trust Department $ 60k - 150,000

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Careers in Finance

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Web Resources