2. FUNDAMENTALS OF CORPORATE FINANCE MGF301 Fall 1998 Vigdis Boasson SUNY at Buffalo vwb@acsu.buffalo.edu

3. Chapter 1Introduction to Corporate Finance Chapter 2Financial Statements, Taxes, and Cash Flow Chapter 3Working with Financial Statements Chapter 4Long-Term Financial Planning and Growth Chapter 5Introduction to Valuation: The Time Value of Money Chapter 6Discounted Cash Flow Valuation Chapter 7Interest Rates and Bond Valuation Chapter 8Stock Valuation Chapter 9Net Present Value and Other Investment Criteria Chapter 10Making Capital Investment Decisions Chapter 11Project Analysis and Evaluation Chapter 12Some Lessons from Capital Market History Table of Contents

4. Chapter 13Return, Risk, and the Security Market Line Chapter 14Cost of Capital Chapter 15Raising Capital Chapter 16Financial Leverage and Capital Structure Policy Chapter 17Dividends and Dividend Policy Chapter 18Short-Term Finance and Planning Chapter 19Cash and Liquidity Management Chapter 20Credit and Inventory Management Chapter 21International Corporate Finance Table of Contents (continued)

5. 1.1 Chapter Outline Chapter 1 Introduction to Corporate Finance n 1.1Corporate Finance and the Financial Manager n 1.2The Corporate Form of Business Organization n 1.3The Goal of Financial Management n 1.4 The Agency Problem and Control of the Corporation n 1.5 Financial Markets and the Corporation n 1.6 Summary and Conclusions

6. 1.1 What is Corporate Finance? n 1. What long-term investments should we make? n 2. Where will we get the funds to pay for our investment? n 3. How will we collect from customers to pay our bills?

7. 1.2 A Simplified Organizational Chart (Figure 1.1) 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

8. 1.3 Forms of Organization n Sole Proprietorship A business owned by a single individual. The owner keeps all the profits but has unlimited liability for business debts. n Partnership A Business formed by two or more individuals or entities. General Partnership / Limited Partnership n Corporation A business created as a distinct legal entity composed of one or more individuals or entities Limited Liability Company

9. 1.4 Limited Liability Companies Limited Liability Companies (LLCs) n Created by state law n Governed by the “operating agreement” (rather than articles of incorporation) n Ownership interests - may or may not be evidenced by ownership shares n Legal and Economic Considerations LLC “members” (i.e., owners) have limited liability LLC is treated as a partnership for tax purposes

10. 1.5 The Goal of Financial Management The Goal of Financial Management n The goal of financial management is to maximize the current value per share of the existing stock. n Three equivalent goals of financial management: Maximize shareholder wealth Maximize share price Maximize firm value

11. 1.6 The Agency Problem The Agency Problem n The agency relationship The relationship between stockholders and management. n Will managers work in the shareholders’ best interests? Agency costs Direct agency costs: Management compensation Indirect agency costs: monitoring managers and suboptimal decisions.

12. 1.7 Financial Markets n Cash flows to and from the firm A firm issues securities to realize cash for investment in assets. The operating cash flows generated from the investment in assets allows for payment of taxes, reinvestment in new assets, and payment of interest and dividends to the investors in the firm’s securities. The financial markets bring the buyers and sellers of debt and equity securities together. n Primary markets: Public offers, SEC registration, underwriters. n secondary markets: Stock exchange (NYSE,AMEX), OTC, Nasdaq.

13. 1.8 Cash Flows between the Firm and the Financial Markets (Figure 1.2) 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

14. 1.9 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?