The Scope Of Corporate Finance Professor XXXXX Course Name / Number

2 Corporate Finance Functions Financial Management Capital-Raising (Financing) Capital Budgeting Risk Management Corporate Governance

The Dimensions of the Capital Raising Function Primary vs Secondary Market Transactions Or Offerings Funding Via Capital Market vs Via Financial Intermediary Money vs Capital Markets Public vs Private Capital Markets Going Public 3

4 Raising Capital: Key Facts Most Financing from Internal Rather Than External Sources Most External Financing is Debt Banks Declining as a Source of Capital for Large Firms Securities Markets Growing in Importance

5 Growth in Global Security Issues ($US Billions) Global debt & equity U.S. Issuers worldwide

6 The Capital Budgeting Function Capital Budgeting – the process firms use to choose the set of investments that generate the most wealth for shareholders

7 The Financial Management Function Managing Daily Cash Inflows and Outflows Forecasting Cash Balances Building a Long-Term Financial Plan Choosing the Right Mix of Debt and Equity

8 The Risk Management Function Managing the Firm’s Exposure to Significant Risks Interest Rate Risk Exchange Rate Risk Commodity Price Risk

9 The Corporate Governance Function Ensuring that Managers Pursue Shareholders’ Objectives Dimensions of Corporate Governance –Board of Directors –Ownership Structure –Capital Structure –Compensation Plan –Country’s Legal Environment Takeover Market Disciplines Firms that Don’t Govern Themselves

10 Global Mergers and Acquisitions, ($ Billions)

11 What Should Managers Maximize? Problems with Profit Maximization –Does not Account for Timing of Returns –Profits - Not Necessarily Cash Flows –Ignores Risk Maximize Shareholder Wealth –Maximize Stock Price, Not Profits –Account for Risk –As “Residual Claimants,” Shareholdsers Have Better Incentives to Maximize Firm Value than Other Stakeholders

12 Agency Costs In Corporate Finance Due to Separation of Ownership and Control –Divergence between Interests of Managers & Shareholders Ways To Deal With Agency Costs –Takeovers, Proxy Contests –Monitoring & Bonding Costs –Compensation Contracts Controversial Method: Executive Compensation –Average S&P 500 CEO Pay in 2001: $9.7 Million

13 Forms Of Business Organization In The U.S. Proprietorship No Distinction Between Business & Person Easy To Set Up, Operate; Taxed As Personal Income Personal Liability, Limited Life, Difficult To Transfer Partnership Two Or More Business Owners Partners - Liable For Every Other Partner’s Actions Limited Partnership One General & Many Limited Partners Limited Liability Of Corporation,Tax Benefits Of Partnership Real-Estate, R&D Comapnies

14 Forms Of Business Organization - Corporations Are there any weaknesses for corporations? YES! Double taxation Corporation Legal Entity With All the Economic Rights & Responsibilities of a Person Incorporation Occurs At State Level; Based On State Law Strengths - Limited Liability To Investors, Unlimited Business Life

15 The Double Taxation of Dividends Taxation of Business Income: Corporations vs Partnerships (Corporate Tax Rate (  c) = 0.35; Personal Tax Rate (  p) = 0.40)

16 Non-U.S. Forms Of Business Organization Limited- Liability Companies PLC In Britain, SA In Spain, Latin America GMBH or AG In Germany, Austria, Switzerland State- Owned Enterprise s Utilities, Airlines, Banks 5% GDP in OECD, 7% in non-OECD Privatization Programs Reduced Role Of SOEs What amount proceeds from Privatization Programs?

17 Privatization Proceeds ($U.S. Billions)

18 Corporate Form of Organization Financial Managers – Responsible for Maximizing Shareholders Wealth How? Perform the 5 Basic Duties of Corporate Finance –Raising Capital –Capital Budgeting –Financial Management –Risk Management –Corporate Governance