1. Goals and Governance of the Firm
Chapter 1
Goals and Governance of the Firm

2. Topics Covered Investment and Financing Decisions
What is a Corporation?
Who Is The Financial Manager?
Goals of the Corporation 2 2 2 2 3 2

3. The Role of The Financial Manager
Capital Budgeting Decision
Decision to invest in tangible or intangible assets.
…also called the Investment Decision 5 5 5 5 6 5

4. The Role of The Financial Manager
“Capital Budgeting”
Tangible Assets
Toyota Plants
@ $3 billion new debt
Intangible Assets
Gillette’s Advertisement
@ $200 million 5 5 5 6 5 5

5. The Role of The Financial Manager
Financing Decision
The form and amount of financing of a firm’s investments.
Capital Structure
The mix of long term debt and equity financing. 5 5 5 5 6 5

6. The Role of The Financial Manager
(2) Cash invested in firm
(2)
(1) Cash raised from investors
(1)
Firm's
(4a) Cash reinvested
(4a)
Financial
operations
Investors
Manager
(3) Cash generated by operations
(3)
Investment assets
Real assets
(4b) Cash returned to investors
(4b) 6 6 6 6 10 11

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 firm’s real assets. 5 5 5 5 6 5

8. What is a Corporation? Corporation Types of Corporations
A business organized as a separate legal entity owned by stockholders.
Types of Corporations
Public Companies
Private Corporations
Limited Liability Corporations (LLC) 3 3 3 3 4 3

9. Who is The Financial Manager?
Chief Financial Officer
Treasurer
Controller 19

10. Who is The Financial Manager?
Chief Financial Officer (CFO)
Oversees the treasurer and controller and sets overall financial strategy.
Treasurer
Responsible for financing, cash management, and relationships with banks and other financial institutions.
Controller
Responsible for budgeting, accounting, and taxes. 3 3 3 3 4 3

11. 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 17

12. 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

13. Agency Problem Agency Problems Stakeholder
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. 3 3 3 3 4 3

14. Goals of The Corporation
Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Legal and Regulatory Requirements 18