Fundamentals of Corporate Finance docx

[...]... disadvantage of corporate organization is double taxation The financial managers of a corporation are responsible, by way of top management and the board of directors, to the corporation’s shareholders Financial managers are supposed to make financial decisions that serve shareholders’ interests Table 1.1 presents the distinctive features of the major forms of business organization HYBRID FORMS OF BUSINESS... controller? Briefly explain CAREERS IN FINANCE SEE BOX In the United States well over 1 million people work in financial services, and many others work in the finance departments of corporations We can’t tell you what each person does all day, but we can give you some idea of the variety of careers in finance The nearby box summarizes the experience of a small sample of recent (fictitious) graduates We... say that their job is to “maximize profits.” That sounds reasonable After all, don’t shareholders want their company to be profitable? But taken literally, profit maximization is not a well-defined corporate objective Here are three reasons: 1 “Maximizing profits” leaves open the question of “which year’s profits?” The company may be able to increase current profits by cutting back on maintenance or... transactions the other party often has more information than you and it is less easy to be sure of the quality of what you are buying This opens up plenty of opportunities for sharp practice and outright fraud, and, because the activities of rogues are more entertaining than those of honest people, bookshelves are packed with accounts of financial fraudsters The reaction of honest financial firms is... was hired as chief executive officer (CEO) by the Walt Disney Company, his compensation package had three main components: a base annual salary of $750,000; an annual bonus of 2 percent of Disney’s net income above a threshold of “normal” profitability; and a 10-year option that allowed him to purchase 2 million shares of stock for $14 per share, which was about the price of Disney stock at the time... keep an eagle eye on the progress of firms receiving their loans We do not want to leave the impression that corporate life is a series of squabbles and endless micromanagement It isn’t, because practical corporate finance has evolved to reconcile personal and corporate interests—to keep everyone working together to increase the value of the whole pie, not merely the size of each person’s slice The agency... firm to sell $500 million of GM stock to investors Some of this stock may be bought by individuals; the remainder will be bought by financial institutions such as pension funds and insurance companies In fact, about a quarter of the shares of U.S companies are owned by pension funds A new issue of securities increases both the amount of cash held by the company and the amount of stocks or bonds held... a strip mall and has financed its inventory with a bank loan Victor has little of his own money invested in the business Video shops usually command little customer loyalty 11 For example, the motto of the London Stock Exchange is “My word is my bond.” discussion is based on Clifford W Smith Jr., “Economics and Ethics: The Case of Salomon Brothers,” Journal of Applied Corporate Finance 5 (Summer 1992),... in the trust department of a bank which manages money for retirement funds, universities, and charitable bodies 16 The Firm and the Financial Manager TABLE 1.2 Representative salaries for senior jobs in finance Career Banking President, medium-size bank Vice president, foreign exchange trading Controller Corporate finance Assistant treasurer Corporate controller Chief financial officer Investment banking... decision, the choice of how to pay for such investments We start by explaining how businesses are organized We then provide a brief introduction to the role of the financial manager and show you why corporate managers need a sophisticated understanding of financial markets Next we turn to the goals of the firm and ask what makes for a good financial decision Is the firm’s aim to maximize profits? To avoid . material from FUNDAMENTALS OF CORPORATE FINANCE, Third Edition with additional material from FUNDAMENTALS OF CORPORATE FINANCE, Alternate Fifth Edition ESSENTIALS OF CORPORATE FINANCE, Second. Marcus Wallace E. Carroll School of Management Boston College with additional material from Fundamentals of Corporate Finance, Alternate Fifth Edition Essentials of Corporate Finance, Second Edition Stephen. material from Fundamentals of Corporate Finance Third Edition Richard A. Brealey Bank of England and London Business School Stewart C. Myers Sloan School of Management Massachusetts Institute of Technology Alan