Chapter 1 Introduction to Corporate Finance
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1 Chapter 1 Introduction to Corporate Finance Konan Chan Financial Management, Fall 2018 Topics Covered Corporate finance and financial manager Forms of business organization Goal of financial management Agency problem and control of the firm Financial markets Financial Management Konan Chan 2
2 Key Concepts and Skills Know the basic types of financial management decisions and the role of the financial manager Know the financial implications of the different forms of business organization Know the goal of financial management Understand the conflicts of interest that can arise between owners and managers Financial Management Konan Chan 3 What is Corporate Finance? Real assets Firm's operations Real assets are assets used to produce goods and service (2) (3) Financial Manager (4a) (1) Cash raised from investors (2) Cash invested in firm Investors Financial Management Konan Chan 4 (1) (4b) (3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors financial assets Financial assets are claims on real assets
3 Role of The Financial Manager Capital budgeting (investment) decision What projects should the firm take? Financing (capital structure) decision How to raise capital for investment? Should the firm use debt or equity? Working capital management How to manage everyday financial activities? Financial Management Konan Chan 5 Who is Financial Manager? Financial Management Konan Chan 6
4 Forms of Business Organization Sole Proprietorships the only owner unlimited liability Partnerships more than one owner (partner) with unlimited liability limited life, difficult to transfer ownership Corporations separation of ownership and management limited liability double taxation financing advantage, widespread ownership Financial Management Konan Chan 7 Forms of Business Organization Financial Management Konan Chan 8
5 Goal of Financial Management What is the goal of a financial manager? maximize profits? minimize costs? maximize market share? Our goal is to maximize share price Shareholders desire wealth maximization Do managers maximize shareholder wealth? Scandals: Enron, WorldCom, Tyco, Sarbanes-Oxley Act in 2002 Financial Management Konan Chan 9 Sarbanes-Oxley Act Sarbox or SOX, enacted in 2002 to reduce potential misconduct Limiting certain actions by executives and increasing overall reporting requirements. No corporate loan to executives Annual assessment of internal control and reporting Officers must review and sign the annual reports and are responsible for accuracy Compliance with SOX is costly due to extensive reporting requirements some firms choose to go dark Financial Management Konan Chan 10
6 Agency Problem and Control Agency problems represent the conflict of interest between management (agent) and owners (principal) Solve agency problem Compensation plans : stock option, high pay Firing (by board of directors) : Apple (Jobs) Proxy fight : HP (Hewlett-Fiorina) Takeovers Other stakeholders Financial Management Konan Chan 11 Financial Markets Financial markets play an important role in corporate finance Types of markets Primary vs. secondary markets Dealer vs. auction markets Listed vs. over-the-counter securities Financial Management Konan Chan 12
7 Careers in Finance Commercial Banking Corporate Finance Investment Banking Money Management Real Estate Insurance Consulting Private Equity Financial Management Konan Chan 13 Careers in Finance Financial Management Konan Chan 14
8 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)? Financial Management Konan Chan 15 Quick Quiz What are the three types of financial management decisions? What are the three major forms of business organization? What is the goal of financial management? What are agency problems and how do people solve them? What are different types of markets? Financial Management Konan Chan 16
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