1. Introduction to Corporate Finance
Chapter 1
Introduction to Corporate Finance
Eric J. McLaughlin, Ph.D.
Notes to the Instructor:
The PowerPoints are designed for an introductory finance class for undergraduates with the emphasis on the key points of each chapter
Each chapter’s PowerPoint is designed for active learning by the students in your classroom
Not everything in the book’s chapter is necessarily duplicated on the PowerPoint slides
There are two finance calculators used (when relevant). You can delete the slides if you don’t use both TI and HP business calculators
Animation is used extensively. You can speed up, slow down or eliminate the animation at your discretion. To do so just open a chapter PowerPoint and go to any slide you want to modify; click on “Animations” on the top of your PowerPoint screen tools; then click on “Custom Animations”. A set of options will appear on the right of your screen. You can “change” or “remove” any line of that particular slide using the icon on the top of the page. The speed is one of the three options on every animation under “timing”.
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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Outline Chapter Outline
Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Financial Markets and the Corporation

3. Chapter Outline Chapter Outline
Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Financial Markets and the Corporation

4. Corporate Finance
Some important questions that are answered using finance:
What long-term investments should the firm take on?
2. Where will we get the long-term financing to pay for the investment?
3. How will we manage the everyday financial activities of the firm?

5. Financial Managers
Chief Financial Officer (CFO):The top financial manager within a firm
Treasurer: Oversees cash management, credit management, capital expenditures, and financial planning
Controller: Oversees taxes, cost accounting, financial accounting and data processing

6. Financial Management Decisions
Capital budgeting
What long-term investments or projects should the business take on?
Capital structure
How should we pay for our assets?
Should we use debt or equity?
Working capital management
How do we manage the day-to-day finances of the firm?

7. Chapter Outline Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Financial Markets and the Corporation

8. Forms of Business Organization in the U.S.
Sole Proprietorship
Single Owner
Partnership
General
Limited
Corporation
C-Corporation
S-Corporation
Limited Liability Company (LLC)

9. Forms of Business Organization in the U.S.
Sole Proprietorship
Single Owner
Partnership
General
Limited
Corporation
C-Corporation
S-Corporation
Limited Liability Company (LLC)

10. Sole Proprietorship Advantages: Easiest to start Least regulated
Single owner keeps all the profits
Taxed once as personal income

11. Sole Proprietorship Disadvantages: Limited to life of owner
Equity capital limited to owner’s personal wealth
Unlimited liability
Difficult to sell ownership interest

12. Forms of Business Organization in the U.S.
Sole Proprietorship
Single Owner
Partnership
General
Limited
Corporation
C-Corporation
S-Corporation
Limited Liability Company (LLC)

13. Partnership Advantages: Two or more owners More capital available
Relatively easy to start
Income taxed once as personal income

14. Partnership Disadvantages: Unlimited liability
General partnership Limited partnership
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership

15. Forms of Business Organization in the U.S.
Sole Proprietorship
Single Owner
Partnership
General
Limited
Corporation
C-Corporation
S-Corporation
Limited Liability Company (LLC)

16. Corporation Advantages: Limited liability Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital

17. Corporation Disadvantages: Separation of ownership and management
Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)

18. Chapter Outline Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Financial Markets and the Corporation

19. Goal of Financial Management
What should be the goal of a corporation?
Maximize profits?
Minimize costs?
Maximize market share?
Maximize the current value of the company’s stock?
Does this mean we should do anything and everything to maximize owner wealth?

20. Chapter Outline Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Financial Markets and the Corporation

21. The Agency Problem Agency relationship
Principal hires an agent to represent his/her interests
Stockholders (principals) hire managers (agents) to run the company
Agency problem
Conflict of interest between principal and agent
Management goals and agency costs

22. Managing Managers Managerial compensation Corporate control
Incentives can be used to align management and stockholder interests
The incentives need to be structured carefully to make sure that they achieve their goal
Corporate control
The threat of a takeover may result in better management
Other stakeholders

23. Work the Web Example
The Internet provides a wealth of information about individual companies
One excellent site is finance.yahoo.com
Click on the web surfer to go to the site, choose a company and see what information you can find!

24. Chapter Outline Corporate Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Problem and Control of the Corporation
Financial Markets and the Corporation

25. ________ ______ Financial Markets
________ ______
Financial Markets
Cash flows to the firm
Primary vs. secondary markets
Dealer vs. auction markets
Listed vs. over-the-counter securities
NYSE
NASDAQ
Video Note: This video discusses how capital is raised in financial markets and shows an open-outcry market at the Chicago Board of Trade.
Discuss the cash flows to the firm. You might have students turn to Figure 1.2 in their book to see an illustration of the cash flows. The main point is that cash comes into the firm from the sale of debt and equity. The money is used to purchase assets. Those assets generate cash that is used to pay stakeholders, reinvest in additional assets, repay debtholders, and pay dividends to stockholders.
The Lecture Tip in the IM provides an interesting example of full disclosure in a firm’s IPO prospectus.
Students are often confused by the fact that the NASDAQ is an OTC market. Explain that the NASDAQ market site is just a convenient place for reporters to show how stocks are moving, but that trading does not actually take place there.
You may wish to note the evolution of these particular markets, e.g., moving to publicly traded firms, emergence of electronic trading, and increased industry consolidation.
www: Click on the NYSE and NASDAQ hyperlinks to go to their respective web sites

26. Ethics Issues
Is it ethical for tobacco companies to sell a product that is known to be addictive and a danger to the health of the user? Is it relevant that the product is legal?
Should boards of directors consider only price when faced with a buyout offer?
Is it ethical to concentrate only on shareholder wealth, or should stakeholders as a whole be considered?
Should firms be penalized for attempting to improve returns by stifling competition (e.g., Microsoft)?
These Ethics Issues can be addressed throughout the chapter or as a dedicated discussion as given here.
The second issue relates to the buyout offer for Gillette that was rejected due to information regarding the launch of the highly successful “Sensor” razor.

27. Terminology Sole Proprietorship Partnership
CFO (Chief Financial Officer)
Sole Proprietorship
Partnership
C-, S-, and LLC Corporations
“Agency” Problem

28. Key Concepts and Skills
Role of the financial manager
Corporation classifications
Goal of financial management
Potential conflicts between financial managers and shareholders

29. What are the most important topics of this chapter?
The CFO’s role in a corporation.
2. Why does the corporation classification matter?
Corporate manager’s possible conflicting goal with the
owners of the company.

30. Questions?