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Introduction To
Corporate Finance

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Key Concepts and Skills

Know the basic types of financial management

decisions and the role of the financial manager
Know the financial implications of the different
forms of business organization
Know the goal of financial management
Understand the conflicts of interest that can
arise between owners and managers
Understand the various types of financial
markets

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 Chapter Outline

Corporate Finance and the Financial

Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of
the Corporation
Financial Markets and the Corporation

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 Finance and Financial Management

Finance means collection of funds and

efficient allocation of funds for
achieving the goals of the organization.
Financial Management is concerned
with the acquisition, financing and
management of assets with some
overall goals in mind.

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 Corporate Finance

Some important questions that are

answered using finance
What long-term investments should the
firm take on?
Where will we get the long-term
financing to pay for the investment?
How will we manage the everyday
financial activities of the firm?
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 Functions of Finance

The decision functions of the financial

management can be broken down into
four major areas:
Investment or long-term asset mix
decisions
Financing or capital-mix decision
Dividend or profit allocation decision
Liquidity or short-term asset-mix decision
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 Financial Manager

Financial managers try to answer some or

all of these questions
The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
Treasurer oversees cash management, credit
management, capital expenditures, and
financial planning
Controller oversees taxes, cost accounting,
financial accounting and data processing
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 Financial Management Decisions

Capital budgeting
What long-term investments or projects
should the business take on?
Capital structure
How should we pay for our assets?
Should we use debt or equity?
Working capital management
How do we manage the day-to-day finances
of the firm?
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 Forms of Business Organization

Three major forms in the United States

Sole proprietorship
Partnership
General
Limited
Corporation
S-Corp
Limited liability company

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 Sole Proprietorship

Advantages Disadvantages
Easiest to start Limited to life of
Least regulated owner
Single owner keeps Equity capital limited
all the profits to owners personal
Taxed once as wealth
personal income Unlimited liability
Difficult to sell
ownership interest

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 Partnership

Advantages Disadvantages
Two or more owners Unlimited liability
More capital available General partnership
Relatively easy to Limited partnership
start Partnership dissolves
Income taxed once as when one partner dies
personal income or wishes to sell
Difficult to transfer
ownership

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 Corporation

Advantages Disadvantages
Limited liability Separation of
Unlimited life ownership and
Separation of management
ownership and Double taxation
management (income taxed at the
Transfer of ownership corporate rate and
then dividends taxed
is easy
at the personal rate)
Easier to raise capital

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 Goal Of Financial Management

What should be the goal of a corporation?

Maximize profit?
Minimize costs?
Maximize market share?
Maximize the current value of the companys
stock?
Does this mean we should do anything
and everything to maximize owner wealth?

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 The Agency Problem

Agency relationship
Principal hires an agent to represent his/her
interests
Stockholders (principals) hire managers
(agents) to run the company
Agency problem
Conflict of interest between principal and agent
Management goals and agency costs

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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
Other stakeholders

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 Work the Web Example

The Internet provides a wealth of

information about individual companies
One excellent site is finance.yahoo.com
Click on the web surfer to go to the site,
choose a company and see what
information you can find!

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 Financial Markets

Cash flows to the firm

Primary vs. secondary markets
Dealer vs. auction markets
Listed vs. over-the-counter securities
NYSE
NASDAQ

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 Financial Markets and The Corporation

Cash flows to and from the firm

Primary versus secondary markets
Primary market: refers to the original
sale of securities by governments
and corporations.
The Secondary markets are those in
which these securities are bought
and sold after the original sale.
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 Auction versus Dealer market

Auction market differ from dealer market in

two ways.
First, an auction market has a physical
location.
Second, in a dealer market, most of the
buying and selling is done by the dealer.
The primary purpose of an auction market is
to match those who wish to sell with those
who wish to buy. Dealers play a limited role.

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 Quick Quiz
What are the three types of financial management
decisions and what questions are they designed to
answer?
What are the three major forms of business
organization?
What is the goal of financial management?
What are agency problems and why do they exist
within a corporation?
What is the difference between a primary market
and a secondary market?
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 1
End of Chapter

McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.