LECTURE 1 INTRODUCTION TO CORPORATE FINANCE FINANCIAL MANAGEMENT DUTIES

Capital Budgeting The process of planning and managing a firms long-term investments. Capital Structure The specific mixture of long-term debt and equity the firm uses to
finance it operations.

Working Capital Management Managing the firms short-term assets and liabilities.
Financial Officers

Chief Financial Officer oversees the treasurer and controller and sets overall financial
strategy.

Treasurer responsible for financing, cash management, and relationships with financial
markets and institutions.

Controller responsible for budgeting, accounting, and auditing.

FORMS OF BUSINESS OWNERSHIP

Proprietorship An unincorporated business owned by a single individual.

Advantages

Easily and inexpensively formed. Few government regulations. Avoids corporate income taxes.

Disadvantages

Unlimited liability for the owner. Limited to the life of the owner. Illiquid.

Difficult to obtain large amounts of capital.

Partnership Business owned by two or more persons who are personally responsible for all
its liabilities. Advantages

Easily and inexpensively formed. Few government regulations. Avoids corporate income taxes.

Disadvantages

Unlimited liability for general partners. Limited life for the organization. Difficult to transfer ownership. Difficult to obtain large amounts of capital.

Corporation A business that is legally distinct from its owners.

Advantages

Unlimited life. Easy to transfer ownership. Limited liability.

Disadvantages

Double taxation. Complex legal requirements.

THE GOAL OF FINANCIAL MANAGEMENT

 Maximize Shareholder Wealth Mangers work on behalf of shareholders and should pursue
policies that enhance shareholder value.

Social Responsibility The concept that businesses should be actively concerned with the
welfare of society at large. Agency Problems and Control of the Corporation

Agency Problem The conflict of interest between the firms owners and managers. Management Goals Managers have a tendency to increase their own perks or to increase
the size of the organization in an attempt to increase their power.

Methods to attract Managers to Act in the Best Interests of Stockholders

The threat of firing The threat of takeovers Managerial compensation Direct Intervention by Shareholders

Ownership Structure outside the U.S. in some countries, ownership is more concentrated, creating separate problems.