1.2What is a Corporation? 1.3Who Is the Financial Manager? 1.4Goals of the Corporation 1.5 Agency Problems, Executive Compensation, and Corporate Governance 1.6The Ethics of Maximizing Value 1.7Careers in Finance 1.8A Preview of Coming Attractions 1.9Snippets of Financial History 1- 2 Investment and Financing Decisions
Capital Budgeting Decision
– Decision to invest in tangible or intangible assets …also called – the Investment Decision – the Capital Expenditure (CAPEX) decision
1- 3 Investment and Financing Decisions
“Capital Budgeting”
TANGIBLE ASSETS INTANGIBLE ASSETS
Southwest Airlines GlaxoSmithKline Purchase new planes R&D expenditures
1- 4 Investment and Financing Decisions
Financing Decision – Decision on the sources and amounts of financing
Capital Structure – The mix of long-term debt and equity financing
1- 5 Investment and Financing Decisions
ASSETS FIRM
Investment Decision Debt Equity
Financing Decision
1- 6 Investment and Financing Decisions
Real Assets – Assets used to produce goods and services
Financial Assets – Financial claims to the income generated by the firm’s real assets
1- 7 Investment and Financing Decisions
Are the following capital budgeting or
financing decisions? – Intel decides to spend $1 billion to develop a new microprocessor – Volkswagen borrows 350 million euros (€350 million) from Deutsche Bank – Royal Dutch Shell constructs a pipeline to bring natural gas onshore from a production platform in Australia – Avon spends €200 million to launch a new range of cosmetics in European markets – Pfizer issues new shares to buy a small biotech company
1- 8 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)
1- 9 What Is a Corporation? Types of Business Organizations – Sole Proprietorships – Partnerships – Corporations – Limited Liability Options • Limited Liability Partnerships • Limited Liability Corporations • Professional Corporations Limited Liability – The owners of a corporation are not personally liable for its obligations 1- 10 What Is a Corporation?
Sole Partnership Corporation
Proprietorship Who owns the business? The manager Partners Stockholders Are managers and owners No No Usually separate? What is the owner’s liability? Unlimited Unlimited Limited Are the owner and business No No Yes taxed separately?
1- 11 What Is a Corporation?
Sole Proprietorships Unlimited Liability Personal tax on profits Partnerships
Limited Liability Corporations Corporate tax on profits + personal tax on dividends
1- 12 Who Is the Financial Manager?
Chief Financial Officer
Treasurer Controller Cash Cash Management Management Preparation Preparation of of Financial Financial Statement Statement Raising Raising capital capital Accounting Banking relationship Taxes Taxes
1- 13 Who Is the Financial Manager? Chief Financial Officer (CFO) – Supervises all financial functions 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 1- 14 Who Is the Financial Manager?
Profit maximization – Maximize profits? Which year’s profits? – Earning manipulation Opportunity cost of capital – The minimum acceptable rate of return on capital investment is set by the investment opportunities available to shareholders in financial markets 1- 16 Goals of the Corporation
The Investment Trade-Off
1- 17 Agency Problem
Do managers maximize shareholder wealth or
manager wealth? Mangers have many constituencies “stakeholders” Stakeholder – Anyone with a financial interest in the corporation
1- 18 Agency Problem
Agency problem – Managers are agents for stockholders and are tempted to act in their own interests rather than maximizing value Agency cost – Value lost from agency problems or from the cost of mitigating agency problems
1- 19 Agency Problem
Ownership vs. Management
Difference in Information Different Objectives
Stock prices vs. returns Managers vs. stockholders Dilution of ownership Top managers vs. lower Dividend policy managers Financing decisions Stockholders vs. banks and lenders
1- 20 Agency Problem
Corporate governance – The laws, regulations, institutions, and corporate practices that protect shareholders and other investors
1- 21 Agency Problem Elements of good corporate governance 1. Legal requirements 2. Board of directors 3. Activist shareholders 4. Takeovers 5. Information for shareholders
1- 22 Ethics of Maximizing Value “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” – Adam Smith, 1776 Does value maximization justify unethical behavior? – Charles Ponzi – Bernard Madoff – Tyco Is it ethical? – Short selling – Corporate raiders – Tax avoidance 1- 23 Preview of Coming Attractions
How do I calculate the value of a stream of future
cash flows? How do I measure risk? Where does financing come from? How do I ensure that the firm’s financial decisions add up to a sensible whole? What about some of those other responsibilities of the financial manager that you mentioned earlier?
