1/9/20

Welcome to Finance II
• Introductions
• The Course Outline
• The Learning Plan
• Expectations and the Environment
• Chapter 1 (A Re-Introduction to the Field)
• Tonight's Outline

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Key Concepts and Skills Chapter Outline

• The types of financial management decisions and • Corporate Finance and the Financial Manager
the role of the financial manager • Forms of Business Organization
• The financial implications of the different forms of
business organization • The Goal of Financial Management
• The goal of financial management • The Agency Problem and Control of the
Corporation
• Understand the conflicts of interest that can arise
between owners and managers • Financial Markets and the Corporation
• Understand the various types of financial markets • Financial Institutions
and financial institutions • Trends in Financial Markets and Financial
• Understand current trends in Canadian financial Management
markets
• Outline of the Text
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Corporate Finance Financial Manager

• Some important questions that are answered • Financial managers try to answer some or all
using finance of these questions
• What long-term investments should the firm take • The top financial manager within a firm is
on? usually the Chief Financial Officer (CFO)
• Where will we get the long-term financing to pay • Treasurer – oversees cash management, capital
for the investment? expenditures and financial planning
• How will we manage the everyday financial • Controller – oversees taxes, cost accounting,
activities of the firm? financial accounting and data processing

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Financial Management Decisions Forms of Business Organization

• Capital budgeting Three major forms in Canada:

• What long-term investments or projects should
the business take on? • Sole proprietorship
• Capital structure • Partnership (General & Limited)
• How should we pay for our assets? • Corporation
• Should we use debt or equity? • In other countries, corporations are also
• Working capital management called joint stock companies, public limited
companies (PLC) and limited liability
• How do we manage the day-to-day finances of
companies (LLC)
the firm?

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Sole Proprietorship Partnership

A business owned by a single individual. A business formed by two or more co-owners.
Advantages
Advantages
• Two or more owners
• Easiest to start
• More human and financial capital available
• Least regulated • Relatively easy to start
• Single owner keeps all the profits • Income taxed once as personal income
• Taxed once as personal income Disadvantages
Disadvantages • Unlimited liability
• Unlimited liability • General partnership
• Limited to life of owner • Limited partnership
• Partnership dissolves when one partner dies or wishes to sell
• Equity capital limited to owner’s personal wealth
• Difficult to transfer ownership
• Difficult to sell ownership interest
• Possible disagreements between partners

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Corporation Income Trust

A business created as a distinct legal entity owned Business income trusts (also called income funds)
by one or more individuals or entities. hold the debt and equity of an underlying business
and distribute the income generated to unit holders.
Advantages
• Limited liability Advantages
• Unlimited life • Not subject to corporate income tax (if income flows through)
• Separation of ownership and management and income is typically taxed in hands of unit holders
• Transfer of ownership is easy • Investors view income trusts as more tax efficient
• Easier to raise capital Disadvantages
• Income trusts are not corporations and so, do not have the
Disadvantages
same advantages as one
• Separation of ownership and management • Growth limited, and structure essentially REIT's in Can.
• Double taxation (income is taxed at the corporate rate and
then dividends are taxed at the personal rate)
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Co-operative (Co-op) Work the Web Example

A co-operative is an enterprise that is equally owned
by its members, who share the benefits of co- • The Internet can help people to get information
operation based on how much they use the co- about how to start a new business
operative’s services. • One excellent site is www.canadabusiness.ca
Advantages
• Regulations can be intimidating, and agencies such
• Equally owned by its members as KEDCO can help.
• Helps its members compete more effectively while creating
social capital
Disadvantages
• Potentially difficult to reach decisions based on premise of
equal ownership by members

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The Goal Of Financial Management Primary Goals of Financial

Management
• What should be the goal of a corporation?
• Maximize profit? Three related goals of financial management:
• Minimize costs?
• Maximize market share? 1. Maximize shareholder wealth
• Maximize the current value of the company’s 2. Maximize share price
stock? 3. Maximize firm value
• Other?
• Does this mean we should do anything and
everything to maximize owner wealth?

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The Agency Problem and

Control of the Corporation
Agency Relationship
• Principal hires an agent to represent their interests
• Stockholders (principals) hire managers (agents) to run
the company
Agency Problem
• Conflicts of interest can exist between the principal and
the agent
Agency Costs
• Direct agency costs --> conflict expenses, monitoring...
• Indirect agency costs --> lost opportunities

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Managing Managers
Managerial compensation
• Incentives can be used to align management and
stockholder interests
• The incentives need to be structured carefully to
make sure that they achieve their goal
Corporate control
• The threat of a takeover may result in better
management
Conflicts with other stakeholders

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Social Responsibility and

Work the Web Example
Ethical Investing
• Investors are increasingly demanding that
corporations behave responsibly • Company Research: Suncor
• Issues include how a corporation treats the
community in which it operates, their customers, • One excellent site is ca.finance.yahoo.com
corporate governance, their employees, the
environment and human rights • Let's see what we can find.
• Controversial business activities include alcohol,
gambling, genetic engineering, nuclear power,
tobacco, weapons, and now even oil and gas...

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The Role of Financial Markets in

Corporate Finance Cash Flows to and from the Firm
• Cash flows to and from the firm
• Money markets vs. capital markets
• Primary vs. secondary markets

• One excellent site for information on Canadian

companies that trade in secondary markets is
www.tmx.com

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Trends in Financial Markets

Financial Institutions
and Management
• Financial institutions act as intermediaries between
suppliers and users of funds • Financial Engineering
• FIs earn income on services provided: • Derivative Securities
• Indirect finance – Earn interest on the spread • Advances in Technology – i.e., E-business
between loans and deposits • Deregulation
• Direct finance – Service fees (i.e. bankers • Corporate Governance Reform
acceptance and stamping fees) • Hedge Funds
• Sub-prime Market

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More to Come Learning Activity

Chapter Topic 1. What are the three types of financial management
1 Introduction decisions and what questions are they designed to
9 Investment Criteria answer?
10 Capital Investment Decisions 2. What are the three major forms of business
14 Cost of Capital organization?
15 Raising Capital 3. What is the goal of financial management?
16 Leverage and Capital Structure 4. What are agency problems and why do they exist
17 Dividends and Dividend Policy within a corporation?
18 Short-Term Financial Planning 5. What is the difference between a primary market
19 Cash and Liquidity Management and a secondary market?
21 International Aspects

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Summary
• You should also know:
• The advantages and disadvantages between a
sole proprietorship, partnership, and corporation
• The primary goal of the firm
• What an agency relationship and agency cost
are
• What ethical investing is
• The role of financial markets
• The role of financial institutions

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