1- 1 Chapter Approach  Chapter 1  Firm Goals/Governance  Road to success with this chapter material Read Chapter 1 first Print the chapter handout Take notes Recognize that “jargon” is a shorthand way of summarizing complicated concepts so don’t give up too soon  Click here to view the Chapter 1 lecture (see and hear) Click here to view the Chapter 1 lecture (see and hear)

1- 2 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard A. Brealey Stewart C. Myers Alan J. Marcus Slides by Matthew Will Chapter 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Goals and Governance of the Firm

1- 3 Topics Covered  Investment and Financing Decisions  What is a Corporation?  Who Is The Financial Manager?  Goals of the Corporation  Careers in Finance

1- 4 The Role of The Financial Manager  Capital Budgeting Decision  Decision to invest in tangible or intangible assets.  …also called the Investment Decision

1- 5 The Role of The Financial Manager  “Capital Budgeting” Tangible Assets Toyota $3 billion new debt Intangible Assets Gillette’s Fusion $200 million

1- 6 The Role of The Financial Manager  Financing Decision  The form and amount of financing of a firm’s investments.  Capital Structure  The mix of long term debt and equity financing.

1- 7 Financial Manager Firm's operations Investors (1) Cash raised from investors (1) (2) Cash invested in firm (2) (3) Cash generated by operations (timber harvest) (3) (4a) Cash reinvested (4a) (4b) Cash returned to investors (4b) The Role of The Financial Manager Real assets (timberland) (stockholders/ debtholders save and invest in a closely held firm.

1- 8 The Role of The Financial Manager  Real Assets  Assets used to produce goods and services. Tangible – machines, buildings, land Intangible – brand value, logistical support  Financial Assets  Financial claims to the income generated by the firm’s real assets.

1- 9 What is a Corporation?  Corporation  A business organized as a separate legal entity owned by stockholders.  Types of Corporations  Public Companies  Private Corporations  Limited Liability Corporations (LLC)

1- 10 Organizing a Business  Types of Business Organizations  Sole Proprietorships  Partnerships  Corporations  Limited Liability Options Limited Liability Partnerships Limited Liability Corporations Professional Corporations

1- 11 Organizing a Business

1- 12 Corporate Structure Sole Proprietorships Corporations Partnerships Limited Liability Corporate tax on profits + Personal tax on dividends Unlimited Liability Personal tax on profits

1- 13 Who is The Financial Manager? Chief Financial Officer TreasurerController

1- 14 Who is The Financial Manager?  Chief Financial Officer (CFO)  Oversees the treasurer and controller and sets overall financial strategy.  Treasurer  Responsible for financing, cash management, and relationships with banks and other financial institutions.  Controller  Responsible for budgeting, accounting, and taxes.

1- 15 Goals of The Corporation  Shareholders desire wealth maximization  Do managers maximize shareholder wealth?  Mangers have many constituencies “stakeholders”  “Agency Problems” represent the conflict of interest between management and owners

1- 16 Goals of The Corporation Ethics & Management Objectives  Does value maximization justify unethical behavior?  Enron example  WorldCom example  Putnam example

1- 17 Agency Problem Difference in Information  Stock prices and returns  Issues of shares and other securities  Dividends  Financing Different Objectives  Managers vs. stockholders  Top mgmt vs. operating mgmt  Stockholders vs. banks and lenders Ownership vs. Management

1- 18 Agency Problem  Agency Problems  Managers, acting as agents for stockholders, may act in their own interests rather than maximizing value.  Stakeholder  Anyone with a financial interest in the firm.

1- 19 Goals of The Corporation Agency Problem Solutions 1 - Compensation plans 2 - Board of Directors 3 - Takeovers 4 - Specialist Monitoring 5 - Legal and Regulatory Requirements

1- 20 Careers in Finance

1- 21 Careers in Finance

1- 22 Web Resources