Introduction To Corporate Finance: Mcgraw-Hill/Irwin
Introduction To Corporate Finance: Mcgraw-Hill/Irwin
Introduction To Corporate Finance: Mcgraw-Hill/Irwin
McGraw-Hill/Irwin
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
1-2
1-3
1-4
Capital structure
How much should the firm borrow to pay for its assets?
What is the best mixture of debt and equity? The least expensive sources of funds?
Corporation
Limited Liability Company Limited Liability Partnerships
1-6
Sole Proprietorship
Advantages
Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income
Disadvantages
Limited to life of owner Equity capital limited to owners personal wealth Unlimited liability Difficult to sell ownership interest
1-7
Partnership
Advantages
Two or more owners More capital available Relatively easy to start Income taxed once as personal income
Disadvantages
Unlimited liability
General partnership Limited partnership
Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership
1-8
Corporation
Advantages
Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital
Disadvantages
Separation of ownership and management May involve double taxation in some countries (income taxed at the corporate rate and then dividends taxed at the personal rate)
1-9
1-10
1-11
Agency problem
Conflict of interest between principal and agent
Agent may not work in the best interest of the principal
1-13
Management Goals
Management goals may be different from shareholder s goals
Management may be more interested in:
Consuming expensive perks Its own survival Its independence
Management may focus on increased growth and size rather than increasing shareholders wealth
Agency Costs
Costs due to the conflict of interest between shareholders and management
Direct
Corporate expenditure that benefits management but costs shareholders, e.g. country club membership Costs to monitor management actions, e.g. auditor costs
Indirect
Lost opportunity due to management forgoing profitable but risky projects for fear of losing job if project fails
1-15
Managing Managers
Managerial compensation
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
1-16
1-17
Financial Markets
Primary market
A market where the firm sells its securities to public for the first time
Secondary markets
A market in which the securities issued by firms are traded
Listed securities trade in an organized exchange, e.g. the stock market (NYSE) Over-the-counter securities are bought from or sold to a dealer
1-18
Quick Quiz
What are the three types of financial management decisions and what questions are they designed to answer? What are the three major forms of business organization? What is the goal of financial management? What are agency problems and why do they exist within a corporation? What is the difference between a primary market and a secondary market?
1-19
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)?
1-20
End of Chapter
1-21