Week1 Corpfin Intro

Topics: Corporate finance, Corporation, Finance Pages: 24 (1786 words) Published: May 12, 2015
CHAPTER

1
1-0

Introduction to
Corporate Finance

GOALS AND GOVERNANCE OF
THE CORPORATION
This chapter introduces the corporation, its goals, and the roles of financial managers.
Number of Firms in the U.S.

Size of Payroll (000s)

Corporation
1.011.9
73

1.292.0
81

622.908
2.584.4
27

SCorporation
Partnership

$1.068.232.09
5

$2.808.013.07
9

$479.673.700

$149.121.474
Source: U.S. Census 2008 SUSB Annual Data
1-1

WHAT IS A CORPORATION?
Corporation-A business organized as a separate legal entity
owned by stockholders.

Types of Corporations:
• Public Corporations
• Private Corporations

1-2

BENEFITS OF THE CORPORATION
Limited liability

Infinite lifespan

Ease of raising capital

1-3

DRAWBACKS OF THE
CORPORATION
Corporations face the problem of double taxation
Improper corporate structures may lead to “Agency
Problems”

1-4

GOALS OF THE CORPORATION
Shareholders want wealth maximization

Wealth maximization vs. profit maximization:
• Pitfall: Profits from which period?
• Pitfall: Cutting dividends to increase cash reserves

1-5

INVESTMENT AND FINANCING
DECISIONS
The Investment Decision
• Real Assets
The Financing Decision
• Financial Assets

1-6

INVESTMENT AND FINANCING
DECISIONS
Are the following capital budgeting or financing decisions?
• Apple decides to spend $500 million to develop a new
iPhone.
• GE borrows $400 million from bond investors.
• Microsoft issues 100 million shares to buy a small
technology company.
1-7

WHAT IS CORPORATE FINANCE?
Corporate Finance addresses the following three questions:

What long-term investments should the firm engage in?
How can the firm raise the money for the required investments? How much short-term cash flow does a company need to pay its bills?

1-8

1.
2.
3.

THE BALANCE-SHEET MODEL
OF THE FIRM
Total Value of Assets:
Current
Assets

Total Firm Value to Investors:
Current
Liabilities
Long-Term
Debt

Fixed Assets

2 Intangible

Shareholders’
Equity
1-9

1 Tangible

THE BALANCE-SHEET MODEL
OF THE FIRM
The Capital Budgeting Decision
Current
Liabilities

Current
Assets

1 Tangible
2 Intangible

What longterm
investments
should the
firm engage
in?

Shareholders
’ Equity
1-10

Fixed Assets

Long-Term
Debt

THE BALANCE-SHEET MODEL
OF THE FIRM
The Capital Structure Decision

How can the firm
raise the money
for the required
Fixed Assets
investments?
1 Tangible
2 Intangible

Long-Term
Debt

Shareholders
’ Equity
1-11

Current
Assets

Current
Liabilities

THE BALANCE-SHEET MODEL
OF THE FIRM
The Net Working Capital Investment Decision

Fixed Assets
1 Tangible
2 Intangible

Net
Working
Capital

How much shortterm cash flow
does a company
need to pay its
bills?

Long-Term
Debt

Shareholders
’ Equity
1-12

Current
Assets

Current
Liabilities

CAPITAL STRUCTURE
The value of the firm can be
thought of as a pie.

The goal of the manager is
to increase the size of the
pie.

70%50%30%
25%
DebtDebt
Equity
75%
50%
Equity

1-13

The Capital Structure
decision can be viewed as
how best to slice up a the
pie.
If how you slice the pie affects the size of the pie,
then the capital structure decision matters.

THE FINANCIAL MANAGER
To create value, the financial manager
should:
1. Try to make smart investment
decisions.

1-14

2. Try to make smart financing decisions.

HYPOTHETICAL ORGANIZATION
CHART
Board of Directors
Chairman of the Board and
Chief Executive Officer (CEO)
President and Chief
Operating Officer (COO)
Vice President and
Chief Financial Officer (CFO)

Controller

Cash Manager

Credit Manager

Tax Manager

Cost Accounting

Capital Expenditures

Financial Planning

Financial Accounting

Data Processing
1-15

Treasurer

THE FINANCIAL MANAGER
Most large companies have 3 top-level financial...
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