1- 1

Fundamentals of Corporate Finance

Sixth Edition

Chapter 1
Goals and Governance of the Firm

Richard A. Brealey Stewart C. Myers Alan J. Marcus

Slides by Matthew Will

McGraw Hill/Irwin McGraw Hill/Irwin

Copyright Copyright 2009 by The McGraw-Hill Companies, Inc. All rights 2009 by The McGraw-Hill Companies, Inc. All rights

1- 2

Topics Covered
Investment and Financing Decisions What is a Corporation? Who Is The Financial Manager? Goals of the Corporation Careers in Finance

1- 3

The Role of The Financial Manager

Capital Budgeting Decision

Decision to invest in tangible or intangible assets.

also called the Investment Decision

1- 4

The Role of The Financial Manager

Capital Budgeting

Tangible Assets Toyota Plants @ $3 billion new debt

Intangible Assets Gillettes Fusion Razor @ $200 million

1- 5

The Role of The Financial Manager

Financing Decision

The form and amount of financing of a firms investments.

Capital Structure

The mix of long term debt and equity financing.

1- 6

The Role of The Financial Manager

(2) (1)

Firm's operations
Real assets

Financial Manager
(3)

(4a)

Investors
Investment assets

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

1- 7

The Role of The Financial Manager

Real Assets

Assets used to produce goods and services.

Financial Assets

Financial claims to the income generated by the firms real assets.

1- 8

What is a Corporation?
Corporation

A business organized as a separate legal entity owned by stockholders.

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

1- 9

Organizing a Business
Types of Business Organizations
Sole Proprietorships Partnerships Corporations Limited Liability Options

Limited Liability Partnerships Limited Liability Corporations Professional Corporations

1- 10

Organizing a Business
Sole Proprietorship Who owns the business? Are managers and owners separate? What is the owner's liability? Are the owner and business taxed separately? The manager Partnership Partners Corporation Stockholders

No

No

Usually

Unlimited

Unlimited

Limited

No

No

Yes

1- 11

Corporate Structure
Sole Proprietorships Unlimited Liability Personal tax on profits Partnerships

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

1- 12

Who is The Financial Manager?

Chief Financial Officer

Treasurer

Controller

1- 13

Who is The Financial Manager?

Chief Financial Officer (CFO)

Oversees the treasurer and controller and sets overall financial strategy. Responsible for financing, cash management, and relationships with banks and other financial institutions. Responsible for budgeting, accounting, and taxes.

Treasurer

Controller

1- 14

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

1- 15

Goals of The Corporation

Ethics & Management Objectives
Does value maximization justify unethical behavior? Enron example WorldCom example Putnam example

1- 16

Agency Problem
Ownership vs. Management
Difference in Information Stock prices and returns Issues of shares and other securities Dividends Financing Different Objectives Managers vs. stockholders Top mgmt vs. operating mgmt Stockholders vs. banks and lenders

1- 17

Agency Problem
Agency Problems

Managers, acting as agents for stockholders, may act in their own interests rather than maximizing value.

Stakeholder

Anyone with a financial interest in the firm.

1- 18

Goals of The Corporation

Agency Problem Solutions 1 - Compensation plans 2 - Board of Directors 3 - Takeovers 4 - Specialist Monitoring 5 - Legal and Regulatory Requirements

1- 19

Careers in Finance
Career Commercial Banking Loan Officer Department Manager Corporate Finance Financial Analyst Credit Manager Chief Financial Officer Investment Banking (bulge bracket) First Year Analyst First Year Associate Assistant Vice President Director/Principal Managing Director/Partner Department Head Money Management Portfolio Manager Bank Trust Department Annual Salary $ 99 + ,999 $ 999 + ,999

$ 99 ,999 -99 $ 77 ,777 -77 $ 999 ,999 -999

$ 99 ,999 -999 $ 777 ,777 -777 $ 999 ,999 -999 $ 999 mil k-9 $ 999 mil k - 99 $ 9 - 99 mil mil

$ 999 + ,999 $ 99 999 k,999

1- 20

Careers in Finance

1- 21

Web Resources