1. Introduction to Corporate Finance

2. Corporate Finance and the Financial Manager

3. Finance Finance consists of three interrelated areas: Money and capital markets Investments Corporate finance

4. Corporate Finance Three main areas of concern: What long-term investments should the firm take? Where will the firm get the long-term financing to pay for its investments? How should the firm manage its everyday financial activities?

5. Financial Management Decisions Capital budgeting Strategic long-term investment decision What long-term investments or projects should the firm take? Capital structure Strategic long-term financing decision How should the firm get the long-term financing to pay for its investments? What is the mixture of a firm’s debt and equity financing? Working capital management Short-term financial planning and management How should the firm manage its everyday financial activities?

6. The Role of the Financial Manager Forecasting and planning Making major investments and financing decisions Capital budgeting Capital structure Working capital management Coordination and control Interaction with money and capital markets The primary task is to make decisions about sources and uses of funds so as to maximize the value of the firm.

7. The Financial Managers The top financial manager in a firm is usually the Chief Financial Officer (CFO) Treasurer – cash management, credit management, capital expenditures, and financial planning, etc. Controller – taxes, cost accounting, financial accounting and data processing, etc.

8. Which of the following questions are addressed by financial managers? A. How should a product be marketed? B. Should customers be given 30 or 45 days to pay for their credit purchases? C. Should the firm borrow more money? D. Should the firm acquire new equipment?

9. Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issue B. deciding whether or not to purchase a new machine for the production line C. deciding how to refinance a debt issue that is maturing D. determining how much inventory to keep on hand E. determining how much money should be kept in the checking account

10. Forms of Business Organization

11. Sole Proprietorship PartnershipCorporation Owner of the business Are managers and owners separate? What is the owner’s liability? Are the owner and business taxed separately?

12. Forms of Business Organization Sole Proprietorship PartnershipCorporation How is it formed? How about raising large sums of capital? What is the life of the business? How about transferring ownership?

13. Forms of Business Organization Sole Proprietorship PartnershipCorporation Owner of the business One personTwo or more partners The shareholders Are managers and owners separate? No Yes What is the owner’s liability? Unlimited Limited Are the owner and business taxed separately? No Yes

14. Forms of Business Organization Sole Proprietorship PartnershipCorporation How is it formed?Easy Complex and time-consuming How about raising large sums of capital? Difficult Easy What is the life of the business? Limited Unlimited How about transferring ownership? Difficult Easy

15. The Value of the Corporation The value of a business will probably be maximized if it is organized as a corporation. Limited liability reduces the firm’s risk. The lower the firm’s risk, the higher the value. A firm’s value depends on its growth opportunities. The greater the ability to raise capital, the more its growth opportunities. The value of the asset depends on its liquidity. The easier the ability to sell the asset and convert it to cash, the higher the value.

16. The Goal of Financial Management

17. Possible Goals Maximize sales? Minimize costs? Maximize profits? Maximize growth? Maximize market share? Maximize stockholder wealth? Maximize stakeholder wealth?

18. Stakeholders and Their Goals StakeholderGoal OwnersDividend or stock appreciation ManagersHigh salary and perquisites CreditorsLow risk and return of principal and interest EmployeesHigh salary and job security CustomersLow price and high quality SuppliersHigh price and long-term relationship GovernmentTaxes SocietyGood citizenship

19. The Goal of Financial Management Modern Finance Theory usually assumes that the objective of the firm is to maximize stockholder wealth. The goal of financial management in a for-profit business is to make decisions that increase the value of the stock or increase the market value of the equity. Is it good for other stakeholders of the company? Is it good for society? If the primary goal is appropriately defined, the other goals which are not mutually exclusive can also be accomplished.

20. Agency Problem

21. 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. Conflict of interest between stockholders and managers.

22. Agency costs The costs of the conflicts of interest between stockholders and management. Direct agency costs Expenditures to monitor managerial actions. Expenditures that benefit the management but cost the stockholders. Indirect agency costs Opportunity costs

23. Managing Managers Proper structuring of managerial incentives Managerial compensation Job prospects Control of the firm The threat of firing The threat of takeover

24. Financial Markets

25. The advantages of the corporate form are enhanced by the existence of financial markets. Easy to transfer ownership Easy to raise large amounts of capital Functions Source of funding Investor liquidity Risk management Source of information

26. Primary vs. Secondary Markets Primary markets The original sale of securities Secondary markets The resale of securities after the original sale