Chapter 1: Outline Corporate Finance and the Financial Manager
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Presentation on theme: "Chapter 1: Outline Corporate Finance and the Financial Manager"— Presentation transcript:
0 Key Concepts and Skills Know the basic types of financial management decisions and the role of the financial managerKnow the financial implications of the different forms of business organizationKnow the goal of financial managementUnderstand the conflicts of interest that can arise between owners and managersUnderstand the various types of financial markets
1 Chapter 1: Outline Corporate Finance and the Financial Manager Forms of Business OrganizationThe Goal of Financial ManagementThe Agency Problem and Control of the CorporationFinancial Markets and the Corporation
2 Corporate FinanceSome important questions that are answered using financeWhat 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?
3 Financial ManagerFinancial managers try to answer some or all of these questionsThe top financial manager within a firm is usually the Chief Financial Officer (CFO)Treasurer – oversees cash management, credit management, capital expenditures and financial planningController – oversees taxes, cost accounting, financial accounting and data processing
4 Financial Management Decisions Capital budgetingWhat long-term investments or projects should the business take on?Capital structureHow should we pay for our assets?Should we use debt or equity?Working capital managementHow do we manage the day-to-day finances of the firm?
5 Forms of Business Organization Three major forms in the United StatesSole proprietorshipPartnershipGeneralLimitedCorporationLimited liability company
6 Sole Proprietorship Advantages Disadvantages Easiest to start Least regulatedSingle owner keeps all the profitsTaxed once as personal incomeDisadvantagesLimited to life of ownerEquity capital limited to owner’s personal wealthUnlimited liabilityDifficult to sell ownership interest
7 Partnership Advantages Disadvantages Two or more owners More capital availableRelatively easy to startIncome taxed once as personal incomeDisadvantagesUnlimited liabilityGeneral partnershipLimited partnershipPartnership dissolves when one partner dies or wishes to sellDifficult to transfer ownership
8 Corporation Advantages Disadvantages Limited liability Unlimited life Separation of ownership and managementTransfer of ownership is easyEasier to raise capitalDisadvantagesSeparation of ownership and managementDouble taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)
9 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?Does this mean we should do anything and everything to maximize owner wealth?
10 The Agency Problem Agency relationship Agency problem Principal hires an agent to represent his/her interestStockholders (principals) hire managers (agents) to run the companyAgency problemConflict of interest between principal and agentManagement goals and agency costs
11 Managing Managers Managerial compensation Corporate control Incentives can be used to align management and stockholder interestsThe incentives need to be structured carefully to make sure that they achieve their goalCorporate controlThe threat of a takeover may result in better managementOther stakeholders
12 Financial Markets Cash flows to the firm Primary vs. secondary markets Dealer vs. auction marketsListed vs. over-the-counter securitiesNYSENASDAQ