Fundamentals of Corporate Finance Chapter The Corporation and The Financial Manager Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- Topics Covered Investment and Financing Decisions What is Corporation? Who Is The Financial Manager? Goals of the Corporation Careers in Finance McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- The Role of The Financial Manager Capital Budgeting Decision Decision to invest in tangible or intangible assets …also called the Investment Decision McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- The Role of The Financial Manager “Capital McGraw-Hill/Irwin Budgeting” Tangible Assets Nontangible Assets Toyota in Texas Gillette’s Mach3 Razor @ $800 million @ $300 million Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- The Role of The Financial Manager Financing Decision Raising money that the firm needs for its investments and operations Capital Structure The McGraw-Hill/Irwin mix of long term debt and equity financing Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- The Role of The Financial Manager (2) Firm's operations Real assets (1) Financial Manager (4a) Investors (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 McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- What is a Corporation? Types of Corporations Public Companies Private Corporations Limited Liability Corporations (LLC) McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- Organizing a Business Types of Business Organizations Sole Proprietorships Partnerships Corporations Limited Liability Partnerships McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- Organizing a Business Sole Partnership Corporation Proprietorship Who owns the business? The manager Partners Shareholders Are managers and owners separate? What is the owner’s liability? Are the owner & business taxed separately? No No Usually Unlimited Unlimited Limited No No Y es McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 10 Corporate Structure Sole Proprietorships Unlimited Liability Personal tax on profits Partnerships Limited Liability Corporations Corporate tax on profits + Personal tax on dividends McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 11 Who is The Financial Manager? Chief Financial Officer Treasurer McGraw-Hill/Irwin Controller Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 12 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 McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 13 Goals of The Corporation Ethics & Management Objectives Does value maximization justify unethical behavior? Enron example WorldCom example AIG example McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 14 Goals of The Corporation Agency Problem Solutions - Compensation plans - Board of Directors - Takeovers - Specialist Monitoring - Auditors McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 15 Careers in Finance McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 16 Careers in Finance McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights ... All rights 1- 11 Who is The Financial Manager? Chief Financial Officer Treasurer McGraw-Hill/Irwin Controller Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 12 Goals of The Corporation... McGraw-Hill Companies, Inc All rights 1- 15 Careers in Finance McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc All rights 1- 16 Careers in Finance McGraw-Hill/Irwin Copyright... McGraw-Hill Companies, Inc All rights 1- The Role of The Financial Manager (2) Firm's operations Real assets (1) Financial Manager (4a) Investors (4b) (3) (1) Cash raised from investors (2) Cash