Chapter 1

Fundamentals of Corporate Finance

Fourth Edition

The Firm and The Financial Manager

Slides by Matthew Will

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Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved

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Topics Covered
Organizing a Business The Role of The Financial Manager Who Is The Financial Manager? Goals of the Corporation CEO Pay

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Organizing a Business
Types of Business Organizations
Sole

Proprietorships Partnerships Corporations Hybrids

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Limited Partnerships LLP LLC PC

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Organizing a Business
Sole Partnership Proprietorship
Who owns the business? Are managers and owners separate? What is the owners liability? Are the owner & business taxed separately?
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Corporation
Shareholders Usually

The manager No

Partners No

Unlimited

Unlimited

Limited

No

No

Yes

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Corporate Structure
Sole Proprietorships

Unlimited Liability
Personal tax on profits

Partnerships

Limited Liability

Corporations

Corporate tax on profits + Personal tax on dividends

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The Role of The Financial Manager

(2) (1)

Firm's operations

Financial Manager
(3)

(4a)

Investors

Real assets

(4b)
(1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors

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The Role of The Financial Manager

Capital Budgeting Decision
Buy

real assets that are worth more than they

cost

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The Role of The Financial Manager

Capital

Budgeting

Tangible Assets Euro Disney @ $2 billion

Nontangible Assets Gillettes Mach3 Razor @ $300 million

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Who is The Financial Manager?

Chief Financial Officer

Treasurer

Controller

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Careers in Finance
Career Commercial Banking Loan Officer Department Manager Corporate Finance Financial Analyst Credit Manager Chief Financial Officer Investment Banking (bulge bracket) First Year Analyst First Year Associate Assistant Vice President Director/Principal Managing Director/Partner Department Head Money Management Portfolio Manager Bank Trust Department Annual Salary $ 60,000 + $ 100,000 +

$ 38 - 47,000 $ 30 - 63,000 $ 232 - 295,000

$ 30 - 110,000 $ 125 - 235,000 $ 200 - 600,000 $ 300k - 1.2 mil $ 400k - 20 mil $ 750k - 70 mil

$ 500,000 + $ 100,000 +

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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 Arthur Andersen example Salomon Brothers example

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Goals of The Corporation

Agency Problem Solutions 1 - Compensation plans 2 - Board of Directors 3 - Takeovers 4 - Specialist Monitoring 5 - Auditors

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CEO Pay
CEO Compensation 2001 ($ millions) Total Earnings from Earnings Stock Options 2.90 0.00 34.60 15.90 4.70 0.00 201.30 198.70 1.00 0.00 32.70 24.30 10.90 1.70 6.60 2.20 2.20 0.79 1.10 0.00 2.10 0.00

CEO Name Philip Condit Sanford Weill Gordon Bethune Michael Dell Michael Eisner Lee Raymond Ray Irani Robert Ulrich David Bernaner Donald Graham Steven Rogel

Company Boeing Citigroup Continental Airlines Dell Computer Walt Disney Exxon Mobil Occidental Petroleum Target Walgreen Washington Post Weyerhauser

source: www.forbes.com/ceos

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Web Resources
Click to access web sites Internet connection required

www.financewise.com www.businessweek.com www.fortune.com www.fei.org www.fma.org/Student/studentindex.htm www.wetfeet.com/asp/home.asp www.corpgov.net www.careers-in-finance.com

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