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Ross 12e PPT Ch01
Ross 12e PPT Ch01
I N T R O D U C T I O N T O C O R P O R AT E F I N A N C E
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
KEY CONCEPTS AND SKILLS
• Define the basic types of financial management decisions
and the role of the financial manager
1-2
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
CHAPTER OUTLINE
• Corporate Finance and the Financial Manager
• Capital structure
How should we pay for our assets?
Should we use debt or equity?
1-6
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
FORMS OF BUSINESS
ORGANIZATION
• Three major forms in the United States (See: Nolo)
• Sole Proprietorship
• Partnership
• General
• Limited
• Corporation
• Limited Liability Company
1-7
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SOLE PROPRIETORSHIP
• Advantages • Disadvantages
Easiest to start Limited to life
Least regulated of owner
Single owner keeps all the Equity capital limited to
profits owner’s personal wealth
Taxed once as personal Unlimited liability
income Difficult to sell ownership
interest
1-8
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PARTNERSHIP
• Advantages • Disadvantages
Two or more owners Unlimited liability
More capital available • General partnership
Relatively easy to start • Limited partnership
1-9
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CORPORATION
• Advantages • Disadvantages
Limited liability Double taxation (income
Unlimited life taxed at the corporate rate
Separation of ownership and then dividends taxed
and management at the personal rate)
Transfer of ownership is
easy
Easier to raise capital
1-10
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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 company’s stock?
1-11
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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
1-12
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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
1-13
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
WORK THE WEB EXAMPLE
• The Internet provides a wealth of information about
individual companies.
• One excellent site is Yahoo! Finance.
• Go to the site, choose a company and see what
information you can find!
1-14
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FIRM CASH FLOWS
1-15
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FINANCIAL MARKETS
• Cash flows to and from the firm
1-16
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
QUICK QUIZ
• What are the three types of financial management decisions and
what questions are they designed to answer?
1-17
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
ETHICS ISSUES
• Is it ethical for tobacco companies to sell a product that is known
to be addictive and a danger to the health of the user? Is it relevant
that the product is legal?
1-19
Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.