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Chapter 1

Firm Goals/Governance
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Fundamentals
of Corporate
Finance
Sixth Edition

Chapter 1
Goals and Governance of the
Firm

Richard A. Brealey
Stewart C. Myers
Alan J. Marcus

Slides by
Matthew Will

McGraw
McGraw Hill/Irwin
Hill/Irwin

Copyright Copyright
2009 byThe
McGraw-Hill
Companies,
Inc. All rights
2009
by The McGraw-Hill
Companies,
Inc. All rights

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Topics Covered
Investment and Financing Decisions
What is a Corporation?
Who Is The Financial Manager?
Goals of the Corporation
Careers in Finance

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The Role of The Financial Manager

Capital Budgeting Decision

Decision to invest in tangible or intangible

assets.

also called the Investment Decision

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The Role of The Financial Manager

Capital Budgeting

Tangible Assets

Intangible Assets

Toyota Plants

Gillettes Fusion Razor

@ $3 billion new debt

@ $200 million

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The Role of The Financial Manager

Financing Decision

The form and amount of financing of a firms

investments.

Capital Structure

The mix of long term debt and equity financing.

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The Role of The Financial Manager

(2)

Firm's
operations
Real assets

(1)

Financial
Manager

(4a)

(4b)

(3)

(timberland)
(1) Cash raised from investors
(2) Cash invested in firm

Investors
(stockholders/
debtholders
save and invest
in a closely
held firm.

(3) Cash generated by operations (timber harvest)

(4a) Cash reinvested
(4b) Cash returned to investors

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The Role of The Financial Manager

Real Assets

Assets used to produce goods and services.

Tangible machines, buildings, land
Intangible brand value, logistical support

Financial Assets

Financial claims to the income generated by the

firms real assets.

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What is a Corporation?
Corporation

A business organized as a separate legal entity

owned by stockholders.

Types of Corporations
Public Companies
Private Corporations
Limited Liability Corporations (LLC)

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Organizing a Business
Types of Business Organizations
Sole Proprietorships
Partnerships
Corporations
Limited Liability Options

Limited Liability Partnerships

Limited Liability Corporations
Professional Corporations

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Organizing a Business

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Corporate Structure
Sole Proprietorships

Unlimited Liability
Personal tax on profits

Partnerships

Limited Liability
Corporations

Corporate tax on profits +

Personal tax on dividends

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Who is The Financial Manager?

Chief Financial Officer

Treasurer

Controller

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Who is The Financial Manager?

Chief Financial Officer (CFO)

Oversees the treasurer and controller and sets

overall financial strategy.

Treasurer

Responsible for financing, cash management, and

relationships with banks and other financial
institutions.

Controller

Responsible for budgeting, accounting, and taxes.

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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

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Goals of The Corporation

Ethics & Management Objectives
Does value maximization justify unethical
behavior?
Enron example
WorldCom example
Putnam example

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Agency Problem
Ownership vs. Management
Difference in Information
Stock prices and returns
Issues of shares and
other securities
Dividends
Financing

Different Objectives
Managers vs.
stockholders
Top mgmt vs.
operating mgmt
Stockholders vs. banks
and lenders

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Agency Problem
Agency Problems

Managers, acting as agents for stockholders, may

act in their own interests rather than maximizing
value.

Stakeholder

Anyone with a financial interest in the firm.

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Goals of The Corporation

Agency Problem Solutions
1 - Compensation plans
2 - Board of Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Legal and Regulatory Requirements

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Careers in Finance

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Careers in Finance

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