Chap001 Foundation

1
Introduction To
Corporate Finance
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Key Concepts and Skills
 Know the basic types of financial

management decisions and the role of the
financial manager
 Know the financial implications of the
different forms of business organization
 Know the goal of financial management
 Understand the conflicts of interest that
can arise between owners and managers
 Understand the various types of financial
markets
1-1
Chapter Outline
 Corporate Finance and the

Financial Manager
 Forms of Business Organization
 The Goal of Financial Management
 The Agency Problem and Control
of the Corporation
 Financial Markets and the
Corporation 1-2
Corporate Finance
 Some important questions that are

answered using finance
 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?
1-3
Financial Manager
 Financial managers try to answer some or

all of these questions
 The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
 Treasurer – oversees cash management, credit
management, capital expenditures, and
financial planning
 Controller – oversees taxes, cost accounting,
financial accounting and data processing
1-4
Financial Management Decisions
 Capital budgeting
 What long-term investments or projects
should the business take on?
 Capital structure
 How should we pay for our assets?
 Should we use debt or equity?
 Working capital management
 How do we manage the day-to-day
finances of the firm?
1-5
Forms of Business Organization
 Three major forms in the United

States
 Sole proprietorship
 Partnership
 General
 Limited
 Corporation
 S-Corp
 Limited liability company
1-6
Sole Proprietorship
 Advantages  Disadvantages
 Easiest to start  Limited to life of
 Least regulated owner
 Single owner keeps  Equity capital limited
all the profits to owner’s personal
 Taxed once as wealth
personal income  Unlimited liability
 Difficult to sell
ownership interest
1-7
Partnership
 Two or more owners  Unlimited liability
 More capital available  General partnership
 Relatively easy to  Limited partnership
start  Partnership dissolves
 Income taxed once as when one partner dies
personal income or wishes to sell
 Difficult to transfer
ownership
1-8
Corporation
 Limited liability  Separation of
 Unlimited life ownership and
 Separation of management
ownership and  Double taxation
management (income taxed at the
 Transfer of ownership corporate rate and
is easy then dividends taxed
at the personal rate)
 Easier to raise capital
1-9
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?
1-10
The Agency Problem
 Agency relationship
 Principal hires an agent to represent his/her
interests
 Stockholders (principals) hire managers
(agents) to run the company
 Agency problem
 Conflict of interest between principal and agent
 Management goals and agency costs
1-11
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
 Other stakeholders
1-12
Work the Web Example
 The Internet provides a wealth of

information about individual companies
 One excellent site is finance.yahoo.com
 Click on the web surfer to go to the site,
choose a company and see what
information you can find!
1-13
Financial Markets
 Cash flows to the firm

 Primary vs. secondary markets
 Dealer vs. auction markets
 Listed vs. over-the-counter securities
 NYSE
 NASDAQ
1-14
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?
1-15
1
End of Chapter
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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1

 Know the basic types of financial

 Corporate Finance and the

 Some important questions that are

 Financial managers try to answer some or

 Three major forms in the United

 What should be the goal of a corporation?

 The Internet provides a wealth of

 Cash flows to the firm

 What are the three types of financial management

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