1.

1 Corporate Finance and the Financial Manager

 Capital Budgeting - the process of planning and managing a firm's long-term investments
o FM tried to identify investment opportunities that are worth more to the firm than they cost
to acquire
o Evaluating the size, timing, and risk of future cash flows
 Capital Structure - mixture of debt and equity maintained by a firm
o How much should the firm borrow, how much debt/equity (both effect risk and value of
firm), which are the least expensive sources of funds for the firm, how and where to raise
the money?
 Working Capital - a firm's short-term assets, such as inventory, and its short-term labilities, such
as money owed to suppliers
o Ensures that the firm has sufficient resources to continue its operations and avoid costly
interruptions
1.2 Forms of Business Organization
 Sole Proprietorship - a business owned by one person
o Pros - owner keeps all the profits
o Cons - owner has unlimited liability for business debts -> creditors can look beyond business
assets at personal asset; no difference between personal and business income, so business
income is taxed as personal income; limited to the lifespan of the owner, equity limited to
personal wealth
 Partnership - a business formed by two or more individuals or entities
o General partnership - share in gains and losses, unlimited liability for all partnership debts
o Limited partnership - general and limited partners; limited partner's liability applies to the
amount they contribute
 Corporation - a business created as a distinct legal entity composed of one or more individuals or
entities
o "Legal person" separate and distinct from its owners, has rights, duties, and privileges
o Forming involves preparing articles of incorporation (charter) and a set of bylaws
o LLC - Limited Liability Company

1.3 The Goal of Financial Management

 Make money or add value for the owners
 Goal of financial management is to maximize the current value per share of the existing stock
 Corporate finance - the study of the relationship between business decisions and the value of the
stock in the business

1.4 The Agency Problem and the Control of the Corporation

 Agency Relationship - relationship between stockholders and management
 Agency Problem - the possibility of conflict of interest between the stockholders and
management of a firm
 Agency Cost - the costs of the conflict of interest between stockholders and management
 Proxy fight - unhappy stockholders can act to replace existing management
 Proxy - authority to vote someone else's stock
 Stakeholders - someone other than a stockholder or creditor who potentially has a claim on the
cash flows of the firm

1.5 Financial Markets and the Corporation

 Differs from other markets concern the types of securities that are traded, how trading is
conducted, and who the buyers and sellers are
 Primary Markets - the original sale of securities by governments and corporations
o Corporation is the seller
o Transaction raises money for the corporation
o Two types of primary market transactions
 Public Offerings - selling securities to the general public
 Private Placements - negotiated sale involving a specific buyer
 Secondary Markets - securities are bought and sold after the original sale
o Transactions involves one owner or creditor selling to another
o Provides means for transferring ownership of corporate securities
o Two types of secondary markets
 Auction Markets - has a physical location (WS), purpose is to match those who wish to
sell with those who wish to buy, dealers play a limited role
 Dealer Markets - over the counter markets, now done electronically; buying and
selling is done by the dealer
 Equity is issued only by corporations, debt is issued by both government and corporations
 Trading in Corporate Securities - equity shares of most of the large firms in the US trade in
organized auction markets, like NYSE.
o NASDAQ - an electronic quotation system, companies tend to be smaller and trade less
actively
 Listing - stocks that trade on an organized exchange are said to be listed on that exchange