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McGraw-Hill/IrwinCopyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedCHAPTER1IntroductiontoCorporateFinanceSlide2Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinKeyConceptsandSkillsKnowthebasictypesoffinancialmanagementdecisionsandtheroleoftheFinancialManagerKnowthefinancialimplicationsofthevariousformsofbusinessorganizationKnowthegoaloffinancialmanagementUnderstandtheconflictsofinterestthatcanarisebetweenownersandmanagersUnderstandthevarioustypesoffinancialmarketsSlide3Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinChapterOutline1.1WhatisCorporateFinance?1.2TheCorporateFirm1.3TheGoalofFinancialManagement1.4TheAgencyProblemandControloftheCorporation1.5FinancialMarketsSlide4Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/Irwin1.1WhatisCorporateFinance?CorporateFinanceaddressesthefollowingthreequestions:1.Whatlong-terminvestmentsshouldthefirmchoose?2.Howshouldthefirmraisefundsfortheselectedinvestments?3.Howshouldshort-termassetsbemanagedandfinanced?Slide5Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinBalanceSheetModeloftheFirmCurrentAssetsFixedAssets1Tangible2IntangibleTotalValueofAssets:Shareholders’EquityCurrentLiabilitiesLong-TermDebtTotalFirmValuetoInvestors:Slide6Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinTheCapitalBudgetingDecisionCurrentAssetsFixedAssets1Tangible2IntangibleShareholders’EquityCurrentLiabilitiesLong-TermDebtWhatlong-terminvestmentsshouldthefirmchoose?Slide7Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinTheCapitalStructureDecisionHowshouldthefirmraisefundsfortheselectedinvestments?CurrentAssetsFixedAssets1Tangible2IntangibleShareholders’EquityCurrentLiabilitiesLong-TermDebtSlide8Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinShort-TermAssetManagementHowshouldshort-termassetsbemanagedandfinanced?NetWorkingCapitalShareholders’EquityCurrentLiabilitiesLong-TermDebtCurrentAssetsFixedAssets1Tangible2IntangibleSlide9Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinCapitalStructureThevalueofthefirmcanbethoughtofasapie.Thegoalofthemanageristoincreasethesizeofthepie.TheCapitalStructuredecisioncanbeviewedashowbesttoslicethepie.Ifhowyouslicethepieaffectsthesizeofthepie,thenthecapitalstructuredecisionmatters.50%Debt50%Equity25%Debt75%Equity70%Debt30%EquitySlide10Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinTheFinancialManagerTheFinancialManager’sprimarygoalistoincreasethevalueofthefirmby:1.Selectingvaluecreatingprojects2.MakingsmartfinancingdecisionsSlide11Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinHypotheticalOrganizationChartChairmanoftheBoardandChiefExecutiveOfficer(CEO)PresidentandChiefOperatingOfficer(COO)VicePresidentandChiefFinancialOfficer(CFO)TreasurerControllerCashManagerCapitalExpendituresCreditManagerFinancialPlanningTaxManagerFinancialAccountingCostAccountingDataProcessingBoardofDirectorsSlide12Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinCashflowfromfirm(C)TheFirmandtheFinancialMarketsTaxes(D)GovernmentRetainedcashflows(F)Investsinassets(B)Dividendsanddebtpayments(E)CurrentassetsFixedassetsShort-termdebtLong-termdebtEquitysharesUltimately,thefirmmustbeacashgeneratingactivity.Thecashflowsfromthefirmmustexceedthecashflowsfromthefinancialmarkets.FirmFirmissuessecurities(A)FinancialmarketsSlide13Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/Irwin1.2TheCorporateFirm•Thecorporateformofbusinessisthestandardmethodforsolvingtheproblemsencounteredinraisinglargeamountsofcash.•However,businessescantakeotherforms.Slide14Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinFormsofBusinessOrganization•TheSoleProprietorship•ThePartnership–GeneralPartnership–LimitedPartnership•TheCorporationSlide15Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/IrwinAComparisonCorporationPartnershipLiquiditySharescanbeeasilyexchangedSubjecttosubstantialrestrictionsVotingRightsUsuallyeachsharegetsonevoteGeneralPartnerisincharge;limitedpartnersmayhavesomevotingrightsTaxationDoublePartnerspaytaxesondistributionsReinvestmentanddividendpayoutBroadlatitudeAllnetcashflowisdistributedtopartnersLiabilityLimitedliabilityGeneralpartnersmayhaveunlimitedliability;limitedpartnersenjoylimitedliabilityContinuityPerpetuallifeLimitedlifeSlide16Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/Irwin1.3TheGoalofFinancialManagement•Whatisthecorrectgoal?–Maximizeprofit?–Minimizecosts?–Maximizemarketshare?–Maximizeshareholderwealth?Slide17Copyright©2008byTheMcGraw-HillCompanies,Inc.AllrightsreservedMcGraw-Hill/Irwin1.4TheAgencyProblem•Agencyrelationship–Principalhiresanagenttorepresenthis/herinterest–Stockholders(principals)hiremanagers(agents)torunthecompany•Agencyproblem–Conflictofinterestbet