Chapter 1 - Topics CoveredOrganizing a BusinessSlide 3Liability/TaxationWhat is a Corporation?Goals of The CorporationSlide 7Slide 8Who is The Financial Manager?The Role of The Financial ManagerSlide 11Slide 12Slide 13Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 1Chapter 1 - Topics CoveredOrganizing a BusinessGoals of the Business Who Is the Financial Manager?Investment and Financing DecisionsCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 2Organizing a BusinessTypes of Business OrganizationsSole ProprietorshipsPartnershipsCorporationsLimited Liability Companies (LLC)Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 3Organizing a BusinessCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 4Liability/TaxationSole ProprietorshipsCorporationsPartnershipsLimited LiabilityCorporate tax on profits +Personal tax on dividends Unlimited LiabilityPersonal tax on profitsLLC Limited LiabilityPersonal tax on profitsCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 5What is a Corporation?Types of CorporationsPublic Corporation: stock is publicly traded on stock exchange – NYSE, NASDAQ, etc.Private Corporation: stock is held by limited number of stockholders and is not actively traded on stock exchangeCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 6Goals of The CorporationShareholders desire wealth maximizationDo managers maximize shareholder wealth?Managers have many constituencies “stakeholders”“Agency Problems” represent the conflict of interest between management and ownersCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 7Goals of The CorporationEthics & Management ObjectivesDoes value maximization justify unethical behavior?Enron example (hid $1.7 billion in losses using special accounting rules for off-balance sheet operations)WorldCom example (overstated income by $3.8 billion)Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 8Goals of The CorporationAgency Problem Solutions1 - Compensation plans2 - Board of Directors3 - Takeovers4 - Specialist Monitoring5 - AuditorsCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 9Who is The Financial Manager?Chief Financial OfficerTreasurer (responsible for financing & cash management, works with financial markets)Controller (responsible for budgeting, accounting, & taxes)Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 10FinancialManagerFirm'soperationsInvestors(1) Cash raised from investors(1)(2) Cash invested in firm(2)(3) Cash generated by operations(3)(4a) Cash reinvested(4a)(4b) Cash returned to investors(4b)The Role of The Financial ManagerReal assetsCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 11The Role of The Financial ManagerCapital Budgeting DecisionDecision to invest in tangible or intangible assets.…also called the Investment DecisionCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 12The Role of The Financial Manager“Capital Budgeting”Tangible AssetsToyota in Texas@ $800 millionNontangible AssetsGillette’s Mach3 Razor @ $300 millionCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin1- 13The Role of The Financial ManagerFinancing DecisionRaising money that the firm needs for its investments and operations.Capital StructureThe mix of long term debt and equity