Chap001 - Corporate Finance
Chap001 - Corporate Finance
Chap001 - Corporate Finance
McGraw-Hill/Irwin
the basic types of financial management decisions and the role of the Financial Manager Know the financial implications of the various forms of business organization Know the goal of financial management Understand the conflicts of interest that can arise between owners and managers Understand the various regulations that firms face
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Chapter Outline
1.1 What is Corporate Finance?
1.2 The Corporate Firm 1.3 The Importance of Cash Flows 1.4 The Goal of Financial Management 1.5 The Agency Problem and Control of the Corporation 1.6 Regulation
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2.
3.
What long-term investments should the firm choose? How should the firm raise funds for the selected investments? How should short-term assets be managed and financed?
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Current Assets
Fixed Assets
1 Tangible 2 Intangible Shareholders Equity
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Current Liabilities
Long-Term Debt
Shareholders Equity
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Current Liabilities
Long-Term Debt
How should the firm raise funds for the selected Fixed Assets investments? 1 Tangible
2 Intangible
Shareholders Equity
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Current Liabilities
Net Working Capital
Long-Term Debt
Shareholders Equity
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Treasurer
Controller
Cash Manager
Capital Expenditures
Tax Manager
Financial Accounting
The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash. However, businesses can take other forms.
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The Corporation
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A Comparison
Corporation Liquidity Shares can be easily exchanged Usually each share gets one vote Partnership Subject to substantial restrictions General Partner is in charge; limited partners may have some voting rights Partners pay taxes on distributions All net cash flow is distributed to partners General partners may have unlimited liability; limited partners enjoy limited liability Limited life
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Voting Rights
Limited liability
Continuity
Perpetual life
Financial markets
Long-term debt
Equity shares
Government
The cash flows from the firm must exceed the cash flows from the financial markets.
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Maximize profit? Minimize costs? Maximize market share? Maximize shareholder wealth?
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relationship
Principal
hires an agent to represent his/her interest Stockholders (principals) hire managers (agents) to run the company
Agency
problem
of interest between principal and agent
Conflict
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Managerial Goals
Increased growth and size are not necessarily equivalent to increased shareholder wealth
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Managing Managers
Managerial
Incentives
compensation
can be used to align management and stockholder interests The incentives need to be structured carefully to make sure that they achieve their intended goal
Corporate
The
control
Other
stakeholders
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1.6 Regulation
The Securities Act of 1933 and the Securities Exchange Act of 1934
Sarbanes-Oxley (Sarbox)
Quick Quiz
What
are the three basic questions Financial Managers must answer? What are the three major forms of business organization? What is the goal of financial management? What are agency problems, and why do they exist within a corporation? What major regulations impact public firms?
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