Chapter 1 Powerpoint

Chapter 1 Powerpoint - 1 Introduction To Corporate Finance...

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Unformatted text preview: 1 Introduction To Corporate Finance 1 Key Concepts and Skills Know the basic types of financial Know management decisions and the role of the financial manager financial Know the financial implications of the Know different forms of business organization different Know the goal of financial management Understand the conflicts of interest that can Understand arise between owners and managers arise Understand the various types of financial Understand markets markets 2 Chapter Outline Corporate Finance and the Financial Corporate Manager Manager Forms of Business Organization The Goal of Financial Management The Agency Problem and Control of the The Corporation Corporation Financial Markets and the Corporation 3 Corporate Finance Some important questions that are Some answered using finance answered What long-term investments should the firm What take on? take Where will we get the long-term financing to Where pay for the investment? pay How will we manage the everyday financial How activities of the firm? activities 4 Finance as Performance Metric BUY SELL Lenders Stock Analysts Ba a AA - Rating Agencies Rating Agencies 5 Finance as Performance Metric Tax and Government Regulators Management Review Shareholders Shareholders 6 Finance as Performance Metric Suppliers Customers Employees Employees 7 Financial Manager Financial managers try to answer some or all of Financial these questions these The top financial manager within a firm is usually The the Chief Financial Officer (CFO) the Treasurer – oversees cash management, credit Treasurer management, capital expenditures, and financial planning planning Controller – oversees taxes, cost accounting, financial Controller accounting and data processing accounting 8 Finance Integrated Business Partner Advisor Commentator Caretaker Scorekeeper Scorekeeper: One who keeps track. Caretaker: One who takes care of something Commentator: One who reports and analyzes. Advisor: One who is empowered to give advice. Integrated Business Partner: Time Source: PwC In the modern business relationship, each partner has something of value to offer and each needs something. Without acting together, neither will succeed. 9 CEO Organization Chart CEO General Counsel CFO CIO Production/ Manufacturing Sales/ Marketing Human Resources Investor Relations * Organization Charts always vary, depending on industry, management style, company size, etc. 10 10 CFO Organization Chart CFO Controller Tax Treasury Financial Planning & Analysis Internal Audits* 11 11 Treasury Organization Chart Treasurer Investing & Borrowing Foreign Currencies Banking/ Cash Mgmt Insurance Credit 12 12 Capital budgeting Financial Management Financial Decisions Decisions What long-term investments or projects should What the business take on? the How should we pay for our assets? Should we use debt or equity? How do we manage the day-to-day finances of How the firm? the 13 13 Capital structure Working capital management Financial Management Financial Decisions Decisions Capital budgeting What long-term investments What or projects should the business take on? business How should we pay for our How assets? assets? Should we use debt or Should debt or equity? equity How do we manage the dayto-day finances of the firm? Capital structure A s s e t s L I a b s Working capital management Equity 14 14 Forms of Business Organization Three major forms in the United States Sole proprietorship Partnership • General • Limited Corporation • S-Corp • Limited liability company 15 15 Sole Proprietorship Advantages Disadvantages Easiest to start Least regulated Single owner keeps all Single the profits the Taxed once as Taxed personal income personal Limited to life of owner Equity capital limited to Equity owner’s personal wealth wealth Unlimited liability Difficult to sell Difficult ownership interest ownership 16 16 Partnership Advantages Disadvantages Two or more owners More capital available Relatively easy to start Income taxed once as Income personal income personal Unlimited liability • General partnership • Limited partnership Partnership dissolves Partnership when one partner dies or wishes to sell or Difficult to transfer Difficult ownership ownership 17 17 Corporation Advantages Disadvantages Limited liability Unlimited life Separation of Separation ownership and management management Transfer of ownership Transfer is easy is Easier to raise capital Separation of Separation ownership and management management Double taxation Double (income taxed at the corporate rate and then dividends taxed at the personal rate) personal 18 18 Goal Of Financial Management What should be the goal of a corporation? Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the company’s Maximize stock? stock? Does this mean we should do anything and Does everything to maximize owner wealth? everything 19 19 Goal Of Financial Management What should be the goal What of a corporation? of Maximize profit? Minimize costs? Maximize market share? Maximize the current Maximize value of the company’s stock? stock? • Short term or long term? • Profits or cash flow? Does this mean we Does should do anything and everything to maximize owner wealth? owner 20 20 Goal Of Financial Management What should be the goal What of a corporation? of Maximize profit? Minimize costs? Maximize market share? Maximize the current Maximize value of the company’s stock? stock? • Can quickly reduce costs by cutting capital spending and R&D, and by laying off people. Does this mean we Does should do anything and everything to maximize owner wealth? owner 21 21 Goal Of Financial Management What should be the goal What of a corporation? of Maximize profit? Minimize costs? Maximize market share? Maximize the current Maximize value of the company’s stock? stock? • Buying market share by selling at a loss Does this mean we Does should do anything and everything to maximize owner wealth? owner 22 22 Goal Of Financial Management What should be the goal What of a corporation? of Maximize profit? Minimize costs? Maximize market share? Maximize the current Maximize value of the company’s stock? stock? • What of other constituents besides the stockholders? Does this mean we Does should do anything and everything to maximize owner wealth? owner 23 23 The Agency Problem Agency relationship Principal hires an agent to represent his/her Principal interest interest Stockholders (principals) hire managers Stockholders (agents) to run the company (agents) Conflict of interest between principal and Conflict agent agent 24 24 Agency problem Management goals and agency costs The Agency Problem Direct agency costs – the purchase of something for management that can’t be justified from a risk-return standpoint, monitoring costs. monitoring Indirect agency costs – management’s tendency to forgo risky or expensive projects that could be justified from a riskprojects return standpoint. return 25 25 Managing Managers Managerial compensation Incentives can be used to align management Incentives and stockholder interests and The incentives need to be structured carefully The to make sure that they achieve their goal to The threat of a takeover may result in better The management management Corporate control Stakeholders and their sometimes Stakeholders conflicting agenda conflicting 26 26 Work the Web Example The Internet provides a wealth of information about The individual companies individual See Blackboard for a sampling of the web sites See that provide financial and market intelligence that 27 27 Capital Markets 28 28 Financial Markets Cash flows to the firm Primary vs. secondary markets Dealer vs. auction markets Listed vs. over-the-counter securities • NYSE • NASDAQ 29 29 Take Aways The three types of financial management decisions and what The questions are they designed to answer questions The three major forms of business organization The goal of financial management Agency problems and why do they exist within a corporation The difference between a primary market and a secondary The market? market? 30 30 Business Finance Questions ? 31 31 ...
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