Chapter 1

Introduction to Corporate Finance,Chapter 1,Know the basic types of financial management decisions and the role of the Financial ManagerKnow the financial implications of the various forms of business organizationKnow the goal of financial managementUnderstand the conflicts of interest that can arise between owners and managersUnderstand the various regulations that firms face,Key Concepts and Skills,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,1.1 What is Corporate Finance?1.2 The Corporate Firm1.3 The Importance of Cash Flows1.4 The Goal of Financial Management1.5 The Agency Problem and Control of the Corporation1.6 Regulation,Chapter Outline,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Corporate Finance addresses the following three questions: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?,1.1 What Is Corporate Finance?,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Balance Sheet Model of the Firm,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,The Capital Budgeting Decision,Current Assets,Fixed Assets1 Tangible 2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,What long-term investments should the firm choose?,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,The Capital Structure Decision,How should the firm raise funds for the selected investments?,Current Assets,Fixed Assets1 Tangible 2 Intangible,Shareholders Equity,Current Liabilities,Long-Term Debt,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Short-Term Asset Management,How should short-term assets be managed and financed?,Net Working Capital,Shareholders Equity,Current Liabilities,Long-Term Debt,Current Assets,Fixed Assets1 Tangible 2 Intangible,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,The Financial Managers primary goal is to increase the value of the firm by: Selecting value creating projects Making smart financing decisions,The Financial Manager,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Hypothetical Organization Chart,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,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.,1.2 The Corporate Firm,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Forms of Business Organization,The Sole ProprietorshipThe PartnershipGeneral PartnershipLimited PartnershipThe Corporation,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,A Comparison,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Cash flowfrom firm (C),1.3 The Importance of Cash Flow,Taxes (D),Retained cash flows (F),Investsin assets(B),Dividends anddebt payments (E),Current assetsFixed assets,Short-term debtLong-term debtEquity shares,Ultimately, the firm must be a cash generating activity.,The cash flows from the firm must exceed the cash flows from the financial markets.,Firm issues securities (A),Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,What is the correct goal?Maximize profit?Minimize costs?Maximize market share?Maximize shareholder wealth?,1.4 The Goal of Financial Management,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Agency relationshipPrincipal hires an agent to represent his/her interestStockholders (principals) hire managers (agents) to run the companyAgency problemConflict of interest between principal and agent,1.5 The Agency Problem,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Managerial goals may be different from shareholder goalsExpensive perquisitesSurvivalIndependenceIncreased growth and size are not necessarily equivalent to increased shareholder wealth,Managerial Goals,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Managerial compensationIncentives can be used to align management and stockholder interestsThe incentives need to be structured carefully to make sure that they achieve their intended goalCorporate controlThe threat of a takeover may result in better managementOther stakeholders,Managing Managers,Copyright 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.,The Securities Act of 1933 and the Securities Exchange Act of 1934 Issuance of Securities (1933)Creation of SEC and reporting requirements (1934)Sarbanes-Oxley (“Sarbox”)Increased re