Chapter 1 Corporate Finance

Financial Manager Questions
What long-term investments should the firm take on?
Where will we get the long-term financing to pay for the investment?
How will we manage the everyday financial activities of the firm?
Financial Manager
Financial Managers try to answer some or all of the questions.
Top Financial Manager- Chief Financial Officer (CFO)
-Treasure
Treasure-oversees cash management, credit management, capital expenditures, and financial planning.
Top Financial Manager- Chief Financial Officer (CFO)
-Controller
Oversees taxes, cost accounting, financial accounting and data processing.
Capital Budgeting Questions
Financial Management Decisions
What long-term investments or projects should the business take on?
Capital Structure Questions
Financial Management Decisions
How should we pay for out assets?
Should we use debt or equity?
Working Capital Management Question Financial Management Decisions
How do we manage the day to day finances of the firm.
Three Major Forms of Business Organizations
1. Sole Proprietorship
2. Partnership
-General
-Limited
3. Corporation
-Limited Liability Company
Sole Proprietorship
-Advantages
-Easiest to Start
-Least regulated
-Single Owner Keeps all the profits.
-Taxed once as personal income.
Sole Proprietorship
-Disadvantages
-Limited to life of owner
-Equity capital limited to owners personal wealth.
-Unlimited liability
-Difficult to sell ownership interest.
Partnership
-Advantages
-Two or more owners
-More Capital Available
-Relatively Easy to start.
-Income Taxed once as personal income.
Partnership
-Disadvantages
Unlimited Liability
-General Partnership
-Limited Partnership
-Partnership Dissolves when one partner dies or wishes to sell.
-Difficult to transfer ownership.
Corporation
-Advantages
-Limited Liability
-Unlimited Life
-Separation of ownership and management.
-Transfer of ownership is easy.
-Easier to raise capital.
Corporation
-Disadvantage
-Double taxations (income taxed at the corporation rate and then dividends taxed at the personal rate)
What is the main goal of financial management?
Maximize ProfitA
Agency Relationship
-Stockholder & Managers
-Principal hires an agent to represent his/her interest.
-Stockholder(principals) hire managers (agents) to run the company.
Agency Problem
Conflict of interest between principal and agent.
Management Goals and Agency Cost
-Direct Cost
1. Corporate expeditures that benefits management but cost the stockholders.
-Corporate Jet
2.Expense that arises from the need to monitor management actions.
-Outside Auditors
Management Goals and Agency Cost
-Indirect Cost
Not taking an risky venture, if management does not take the investment, then the stockholders may lose an valuable opportunity.
Managing Managers
-Managerial Compensation
-Incentives can be used to align management and stockholder interest.
-The incentives need to be stucutred carefully to make sure that they achieve their goal.
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Managing Managers
Corporate Control
The threat of a takeover may result in better management.
Managing Managers
-Other Stakeholder
Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
Primary Markets
In a primary market transaction, the corporation is the seller, and the transaction raises money for the corporation. There are two types of transactions.
1. Public Offerings
2. Private Placements(negotiated sale involving a specific buyer)
Secondary Markets
A transaction involves one owner or creditor selling to another. Transferring ownership or corporate securities.
Dealer Markets
Dealers Buy and Sell for themselves at their own risk. Dealer markets in stocks and long-term debt are called over-the-counter markets.
Auction Markets
1. Has a physical location.
2. Primary purpose of an auction market, on the other hand is to match those who wish to sell with those who wish to buy.
NYSE
Largest auction market.
NASDAQ
Large OTC market for stocks.