Principles of Finance – Fall 2012 (FIN 3403) Instructor: Nina Schmidt, Ph.D. OUTLINE: Welcome & Introduction Syllabus, Blackboard and Connect Chapter 1 0

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Introduction to Corporate Finance Chapter 1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Chapter Outline Financial Management The Agency Problem Forms of Business Organization Financial Markets Class Overview 3

Financial Management Def of Finance: the study of money The goal of the financial manager: maximize market share or profits? best: “optimize shareholder value” 4

Financial Management The Three Main Decisions (Functions) of the financial manager: 1.Capital budgeting or investment decisions 2.Capital structure or financing decisions 3.Working capital management or day to day cash management decisions (note: we will focus on the corporate world) 5

Sample Organizational Chart 6

The Agency Problem An agency relationship is also called a fiduciary relationship. In an agency relationship the represents the. An agency problem exists when a exists between the agent and the principal. The solution for the agency problem: tie management compensation to stock price performance Corporate Scandals and Sarbanes Oxley Act of

8 Forms of Business Organization Characteristics: Sole Proprietorship Partnership (General or Limited) Corporation Life of Business Ability to Raise Cash Taxation Liability Transfer of Ownership

Forms of Business Organization Two forms of business organization that take advantage of the benefits of a corporation but avoid double taxation: S-Corp and LLC. Legal information can be found on legal websites, such as:

Financial Markets: Cash Flows between the Firm and the Financial Markets 10

Financial Markets Primary vs. Secondary Markets Secondary Markets: Dealer vs. Auction Markets - Dealer Market: No physical location (over the counter OTC) for example: NASDAQ - Auction Market: Physical location for example: NYSE, AMEX, CBOT 11

“NYSE in the Digital Age” Sarasota Herald Tribune, Feb 18 th, 2007, Page D 1 Traders on a crowded NYSE trading floor in November 1968 Traders on the NYSE trading floor in November 2006.

Class Overview: Principles of Finance Goal of Financial Manager: Three Main Decisions Ch 1: Introduction Ch 2 & 3: Financial Statements, Ratios, Cash Flows Ch 5 & 6: Time Value of Money → Exam I Ch 7: Bond Valuation Ch 8: Stock Valuation Ch 9: NPV and other Investment Criteria Ch 10: Making Capital Investment Decisions → Exam II Capital Budgeting Investing = Spending Money Long Term Short Term Capital Structure Financing = Getting Money Working Capital Management Ch 12: Capital Market History Ch 13: Risk, Return and the Capital Asset Pricing Model Ch 14: Cost of Capital & WACC Ch 16: Financial Leverage and Capital Structure → Cumulative Final Exam Optimize Shareholders’ Wealth 13