1. Chapter 1 Introduction to Corporate Finance Corporate Finance and the Financial Manager Forms of Business Organization The Goal of Financial Management The Agency Problem and Control of the Corporation Financial Markets & the Corporation Financial Institutions

2. Focus of Corporate Finance The financial manager focuses on three issues:  capital budgeting is the process of planning and managing a firm’s long term investments  Capital structure considers the mix of debt and equity in the firm with the view to maximize firm value  Working capital concerns the planning and managing the firm’s current assets and liabilities

3. Organizational Chart Outlining Reporting Relationships Chairman of the Board and Chief Executive Officer (CEO) Board of Directors President and Chief Operations Officer (COO) Vice President Marketing Vice President Finance (CFO) Vice President Production Treasurer Controller Cash Manager Credit Manager Tax Manager Cost Accounting Manager Capital Expenditures Financial Planning Financial Accounting Manager Data Processing Manager

4. Forms of Organization Sole Proprietorship Partnership General Partnership / Limited Partnership Corporation Distinct legal entity with limited liability Legal Considerations How do owners’ roles differ across organizational forms? Economic Considerations Why are corporations generally larger than other forms of business?

5. The Goal of Financial Management What are firm decision-makers hired to do? “General Motors is not in the business of makingautomobiles. General Motors is in the business of making money.” Alfred P. Sloan Possible goals--largely profitability and controlling risk Three equivalent goals of financial management: Maximize shareholder wealth Maximize share price Maximize firm value

6. The Agency Problem The agency relationship--shareholders/management Will managers work in the shareholders’ best interests? Direct agency Costs Indirect agency Costs--lost opportunity Control of the firm-- shareholders>board>management Other stakeholders--potential claim on firm’s cash flow

7. Financial Markets What is the role of financial markets in corporate finance? Cash flows to and from the firm Money markets and capital markets Primary vs. secondary markets

8. Cash Flows between the Firm and the Financial Markets Total Value of Firm’s Assets Total Value of the Firm to Investors in the Financial Markets B. Firm invests in assets Current Assets Fixed Assets C. Cash flow from firm’s assets D. Government E. Retained cash flows A. Firm issues securities F. Dividends and debt payments Financial Markets Short-term debt Long-term debt Equity shares

9. T1.9 Chapter 1 Quick Quiz Quick Quiz 1. Who performs the financial management function in the typical corporation? 2. What are the major advantages and disadvantages of the corporate form of organization? 3. Why is shareholder wealth maximization a more appropriate goal than profit maximization?