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

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

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

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

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

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

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

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

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

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

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

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

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

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