1. 1-0 0 Course Overview Finance: what is it? Corporations Investors Financial Markets: Banks, Stock Exchanges Corporate Finance Money and capital marketsInvestments

2. 1-1 1 Course organization  This course is broken-down into three parts  1: valuation of financial assets (Bonds, stocks)  2: valuation of real assets (capital budgeting)  3: capital structure theory (financing with debt or issuing stocks)

3. 1-2 2 Financial Management Decisions  Capital budgeting  What long-term investments or projects should the business take on?  Capital structure  How should we pay for our assets?  Should we use debt or equity?

4. 3 The Balance-Sheet Model of the Firm What long-term investments should the firm engage in? The Capital Budgeting Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Current Liabilities Long-Term Debt Shareholders’ Equity

5. 4 The Balance-Sheet Model of the Firm How can the firm raise the money for the required investments? The Capital Structure Decision Current Assets Fixed Assets 1 Tangible 2 Intangible Current Liabilities Long-Term Debt Shareholders’ Equity

6. 1-5 5 Sole Proprietorship  Advantages  Easiest to start  Least regulated  Single owner keeps all the profits  Taxed once as personal income  Disadvantages  Limited to life of owner  Unlimited liability  Difficult to sell ownership interest  Difficult to raise capital

7. 1-6 6 Corporation  Advantages  Limited liability  Unlimited life  Transfer of ownership is easy  Easier to raise capital  Disadvantages  Separation of ownership and management (agency problem)  Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)

8. 1-7 7 The Agency Problem  Agency relationship  Principal hires an agent to represent their interest  Stockholders (principals) hire managers (agents) to run the company  Agency problem  Conflict of interest between principal and agent

9. 8 Quiz 1.1 The decision regarding which fixed assets to buy is called the __________ decision. A.Financing B.Working capital C.Capital Structure D.Capital Budgeting

10. 9 Quiz 1.2 Corporations have advantages over proprietorships and partnerships because of the __________. A.Tax free status B.Separation of ownership from management C.Unlimited liability D.Reduced reporting requirements E.Ability to raise large amount of capital

11. 10 Quiz 1.3 The primary goal of the corporation is maximization of __________. A.Profit B.Sales growth C.Goodwill D.Shareholder wealth

12. 11 Quiz 1.4 Because management goals may conflict with shareholder goals, __________ are said to exist. A.Synergies B.Agency problems C.Growth opportunities D.Contingent claims