Chapter 1

Fundamentals of
Corporate The Corporation and
Finance The Financial Manager
Fifth Edition

Slides by
Matthew Will

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 2

Topics Covered

Investment and Financing Decisions

What is Corporation?
Who Is The Financial Manager?
Goals of the Corporation
Careers in Finance

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 3

The Role of The Financial Manager

Capital Budgeting Decision

Decision to invest in tangible or intangible
assets.
…also called the Investment Decision

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 4

The Role of The Financial Manager

“Capital Budgeting”

Tangible Assets Nontangible Assets

Toyota in Texas Gillette’s Mach3 Razor
@ $800 million @ $300 million

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 5

The Role of The Financial Manager

Financing Decision
Raising money that the firm needs for its
investments and operations.

Capital Structure
The mix of long term debt and equity financing.

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 6

The Role of The Financial Manager

(2) (1)
Firm's
Financial
operations (4a) Investors
Manager

Real assets
(3) (4b)

(1) Cash raised from investors

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

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 7

What is a Corporation?

Types of Corporations
Public Companies
Private Corporations
Limited Liability Corporations (LLC)

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 8

Organizing a Business

Types of Business Organizations

Sole Proprietorships
Partnerships
Corporations
Limited Liability Partnerships

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 9

Organizing a Business
Sole Partnership Corporation
Proprietorship
Who owns the The manager Partners Shareholders
business?
Are managers No No Usually
and owners
separate?
What is the Unlimited Unlimited Limited
owner’s
liability?
Are the owner No No Yes
& business
taxed
separately?

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 10

Corporate Structure

Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships

Limited Liability
Corporations Corporate tax on profits +
Personal tax on dividends

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 11

Who is The Financial Manager?

Chief Financial Officer

Treasurer Controller

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 12

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
McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 13

Goals of The Corporation

Ethics & Management Objectives

 Does value maximization justify unethical behavior?
 Enron example
 WorldCom example
 AIG example

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 14

Goals of The Corporation

Agency Problem Solutions

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

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 15

Careers in Finance
Career Annual Salary
Commercial Banking
Loan Officer $ 60,000 +
Department Manager $ 100,000 +

Corporate Finance
Financial Analyst $ 38 - 47,000
Credit Manager $ 30 - 63,000
Chief Financial Officer $ 232 - 295,000

Investment Banking (bulge bracket)

First Year Analyst $ 60 - 110,000
First Year Associate $ 125 - 235,000
Assistant Vice President $ 200 - 600,000
Director/Principal $ 300k - 1.2 mil
Managing Director/Partner $ 400k - 20 mil
Department Head $ 750k - 70 mil

Money Management
Portfolio Manager $ 500,000 +
Bank Trust Department $ 100,000 +

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
1- 16

Careers in Finance

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved