1. 1- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard A. Brealey Stewart C. Myers Alan J. Marcus Slides by Matthew Will Chapter 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved The Corporation and the Financial Manager

2. 1- 2 Topics Covered  Investment and Financing Decisions  What is a Corporation?  Who Is The Financial Manager?  Goals of the Corporation  Careers in Finance

3. 1- 3 The Role of The Financial Manager  Capital Budgeting Decision  Decision to invest in tangible or intangible assets.  …also called the Investment Decision

4. 1- 4 The Role of The Financial Manager  “Capital Budgeting” Tangible Assets Toyota Plants @ $3 billion new debt Intangible Assets Gillette’s Fusion Razor @ $200 million

5. 1- 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.

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

7. 1- 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.

8. 1- 8 What is a Corporation?  Corporation  A business organized as a separate legal entity owned by stockholders.  Types of Corporations  Public Companies  Private Corporations  Limited Liability Corporations (LLC)

9. 1- 9 Organizing a Business  Types of Business Organizations  Sole Proprietorships  Partnerships  Corporations  Limited Liability Options Limited Liability Partnerships Limited Liability Corporations Professional Corporations

10. 1- 10 Organizing a Business

11. 1- 11 Corporate Structure Sole Proprietorships Corporations Partnerships Limited Liability Corporate tax on profits + Personal tax on dividends Unlimited Liability Personal tax on profits

12. 1- 12 Who is The Financial Manager? Chief Financial Officer TreasurerController

13. 1- 13 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.

14. 1- 14 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

15. 1- 15 Goals of The Corporation Ethics & Management Objectives  Does value maximization justify unethical behavior?  Enron example  WorldCom example  Putnam example

16. 1- 16 Agency Problem 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 Ownership vs. Management

17. 1- 17 Agency Problem  Agency Problems  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.

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

19. 1- 19 Careers in Finance

20. 1- 20 Careers in Finance

21. 1- 21 Web Resources