1. Chapter 1 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved The Corporation and The Financial Manager

2. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 2 Topics Covered  Investment and Financing Decisions  What is Corporation?  Who Is The Financial Manager?  Goals of the Corporation  Careers in Finance

3. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 3 The Role of The Financial Manager  Capital Budgeting Decision  Decision to invest in tangible or intangible assets.  …also called the Investment Decision

4. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 4 The Role of The Financial Manager  “Capital Budgeting” Tangible Assets Toyota in Texas @ $800 million Nontangible Assets Gillette’s Mach3 Razor @ $300 million

5. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 5 The Role of The Financial Manager  Financing Decision  Raising money that the firm needs for its investments and operations.  Capital Structure  The mix of long term debt and equity financing.

6. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 6 Financial Manager Firm's operations Investors (1) Cash raised from investors (1) (2) Cash invested in firm (2) (3) Cash generated by operations (3) (4a) Cash reinvested (4a) (4b) Cash returned to investors (4b) The Role of The Financial Manager Real assets

7. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 7 What is a Corporation?  Types of Corporations  Public Companies  Private Corporations  Limited Liability Corporations (LLC)

8. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 8 Organizing a Business  Types of Business Organizations  Sole Proprietorships  Partnerships  Corporations (C and S – difference is important)  Limited Liability Partnerships

9. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 9 How to organize?  It all depends on  objectives,  how much trouble you want to go to,  tax consequences and  your tolerance for risk

10. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 10 Options? 1. Non-profit organization – no owners, no taxes 2. Sole proprietor or partnership – easy to set up, liable for debts, pay taxes through personal returns (business expenses are tax deductions), difficulties raising capital 3. Corporation – important to know there are 2 kinds:  C Corp- Trouble to establish, Limited liability, owners & entity taxed separately. Easier to raise capital  S Corp/LLC/LLP/PC– medium trouble to set up, limited liability, taxes through personal returns (business expenses are tax deductions)

11. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 11 Organizing a Business

12. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 12 Who is The Financial Manager? Chief Financial Officer TreasurerController

13. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 13 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

14. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 14 Goals of The Corporation Ethics & Management Objectives  Does value maximization justify unethical behavior?  Enron example  WorldCom example  AIG example

15. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 15 Goals of The Corporation Agency Problem Solutions 1 - Compensation plans 2 - Board of Directors 3 - Takeovers 4 - Specialist Monitoring 5 - Auditors

16. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 16 Careers in Finance

17. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 17 Careers in Finance

18. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 1- 18 Web Resources www.nolo.com www.bizfilings.com www.business-ethics.com www.corpgov.net www.thecorporatelibrary.com www.careers-in-finance.com www.careers.wsj.com www.wageweb.com www.financeprofessor.com Click to access web sites Internet connection required