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Fundamentals
of Corporate Chapter 1
Finance
Goals and Governance of the
Sixth Edition Firm
Richard A. Brealey
Stewart C. Myers
Alan J. Marcus

Slides by
Matthew Will

McGraw
McGraw Hill/Irwin
Hill/Irwin Copyright ©Copyright
2009 by The McGraw-Hill
© 2009 Companies, Inc.
by The McGraw-Hill All rights
Companies, reserved
Inc. All rights reserved
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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 Gillette’s 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 firm’s
investments.

 Capital Structure
 The mix of long term debt and equity financing.
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The Role of The Financial Manager

(2) (1)
Firm's
Financial
operations (4a) Investors
Manager

Real assets Investment

(3) (4b) assets

(1) Cash raised from investors

(2) Cash invested in firm
(3) Cash generated by operations
(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.

 Financial Assets
 Financial claims to the income generated by the
firm’s 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

Sole
Proprietorship Partnership Corporation

Who owns the

The manager Partners Stockholders
business?

Are managers and

No No Usually
owners separate?

What is the owner's

Unlimited Unlimited Limited
liability?

Are the owner and

business taxed No No Yes
separately?
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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 Different Objectives
 Stock prices and returns  Managers vs.
 Issues of shares and stockholders
other securities  Top mgmt vs.
 Dividends operating mgmt
 Financing  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
Career Annual Salary
Commercial Banking
Loan Officer $ 90,000 +
Department Manager $ 200,000 +

Corporate Finance
Financial Analyst $ 61-78,000
Credit Manager $ 73-92,000
Chief Financial Officer $ 222-367,000

Investment Banking (bulge bracket)

First Year Analyst $ 90-180,000
First Year Associate $ 200-350,000
Assistant Vice President $ 300-900,000
Director/Principal $ 500k - 2 mil
Managing Director/Partner $ 600k - 30 mil
Department Head $ 1 mil - 70 mil

Money Management
Portfolio Manager $ 500,000 +
Bank Trust Department $ 60k - 150,000
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Careers in Finance
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