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1-2 Goals and Governance of the Corporation This chapter introduces the corporation, its goals, and the roles of financial managers. Source: U.S. Census 2008 SUSB Annual Data

1-3 Investment and Financing Decisions The Investment Decision  Real Assets The Financing Decision  Financial Assets

1-4 Investment and Financing Decisions Are the following capital budgeting or financing decisions?  Apple decides to spend $500 million to develop a new iPhone.  GE borrows $400 million from bond investors.  Microsoft issues 100 million shares to buy a small technology company.

1-5 What is a Corporation?  Corporation-A business organized as a separate legal entity owned by stockholders.  Types of Corporations:  Public Corporations  Private Corporations

1-6 Benefits of the Corporation  Limited liability  Infinite lifespan  Ease of raising capital

1-7 Drawbacks of the Corporation  Corporations face the problem of double taxation  Improper corporate structures may lead to “Agency Problems”

1-8 Goals of The Corporation  Shareholders want wealth maximization  Wealth maximization vs. profit maximization:  Pitfall: Profits from which period?  Pitfall: Cutting dividends to increase cash reserves

1-9 The Ethics of Maximizing Value Does value maximization justify unethical behavior? Recent examples :  Enron  WorldCom  Bernard Madoff

1-10 Agency Problem Do managers really maximize value?  Agency Problems Managers are agents for stockholders, but the managers may act in their own interests rather than maximizing value  Shareholders vs. Stakeholders

1-11 Agency Problem Different Information  Stock prices vs. returns  Dividend Policy  Financing Decisions Different Objectives  Managers vs. shareholders  Top managers vs. lower managers  Stockholders vs. banks and lenders

1-12 Agency Problem Solutions Compensation plans Board of Directors Blockholders

1-13 Agency Problem Solutions Takeovers Specialist Monitoring Legal and Regulatory Requirements

1-14 4A. Cash reinvested in the firm 4B. Cash returned to investors Role of the Financial Manager Financial Manager (1) (2) (3) (4a) (4b) Real assets Investors Financial Assets Firm’s Operations 1.Cash raised from investors (how?) 2.Cash invested in firm 3.Cash generated by operations

1-15 The Financial Manager Most large companies have 3 top-level financial managers:

1-16 Appendix: Careers in Finance