PowerPoint PresentationKey Concepts and SkillsChapter Outline1.1 What Is Corporate Finance?Balance Sheet Model of the FirmThe Balance Sheet Reveals…The Capital Budgeting DecisionThe Capital Structure DecisionShort-Term Asset ManagementThe Financial ManagerHypothetical Organization Chart1.2 The Corporate FirmForms of Business OrganizationA ComparisonA Global Phenomenon1.3 The Importance of Cash FlowsThe Conceptual Flow of CashCash Flow ≠ Accounting Income1.4 The Goal of Financial Management1.5 The Agency ProblemAgency CostManagement GoalsManaging Managers1.6 RegulationQuick QuizINTRODUCTION TO CORPORATE FINANCEChapter 1Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.1-2KEY CONCEPTS AND SKILLS•Know the three main concerns of corporate financial management•Grasp the goal of financial management•Enumerate the financial benefits and drawbacks of differing forms of business organization•Understand the conflicts of interest that can arise between owners and managers•Comprehend that corporate organizations are enhanced by financial markets1-3CHAPTER OUTLINE1.1 What is Corporate Finance?1.2 The Corporate Firm1.3 The Importance of Cash Flows1.4 The Goal of Financial Management1.5 The Agency Problem and Control of the Corporation1.6 Regulation1-41.1 WHAT IS CORPORATE FINANCE?•Economic resources are required to establish and maintain a firm:•Funds enable materials and processes for delivering salable goods and services•Funds are essential for assembling a workforce•Funds are required to purchase long-lived assets such as equipment and buildings•The Balance Sheet offers insight into the array of decisions, activities and objectives of the Financial ManagerBALANCE SHEET MODEL OF THE FIRMCurrent AssetsFixed Assets1 Tangible 2 IntangibleTotal Value of Assets:Shareholders’ EquityCurrent LiabilitiesLong-Term DebtTotal Firm Value to Investors:1-51-6THE BALANCE SHEET REVEALS……the top three concerns of corporate finance:1. What long-term investments should the firm choose?2. How should the firm raise funds for the selected investments?3. How should current assets be managed and financed?THE CAPITAL BUDGETING DECISIONCurrent AssetsFixed Assets1 Tangible 2 IntangibleShareholders’ EquityCurrent LiabilitiesLong-Term DebtWhat long-term investments should the firm choose?1-7THE CAPITAL STRUCTURE DECISIONHow should the firm raise funds for the selected investments?Current AssetsFixed Assets1 Tangible 2 IntangibleShareholders’ EquityCurrent LiabilitiesLong-Term Debt1-8SHORT-TERM ASSET MANAGEMENTHow should short-term assets be managed and financed?Net Working CapitalShareholders’ EquityCurrent LiabilitiesLong-Term DebtCurrent AssetsFixed Assets1 Tangible 2 Intangible1-91-10THE FINANCIAL MANAGER• The firm’s three main financial concerns are usually handled by a top officer and aides:• V.P. or Chief Financial Officer• Strategist, coordinator, authority•Treasurer• Cash flow, capital expenditures, capital structure• Controller• Accounting, information systems, taxes1-11HYPOTHETICAL ORGANIZATION CHARTChairman of the Board and Chief Executive Officer (CEO)President and Chief Operating Officer (COO)Vice President and Chief Financial Officer (CFO)Treasurer ControllerCash ManagerCapital ExpendituresCredit ManagerFinancial PlanningTax ManagerFinancial AccountingCost Accounting Data Processing Board of Directors1-121.2 THE CORPORATE FIRM•First company problem: raise funds•The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.•However, businesses can take other forms.FORMS OF BUSINESS ORGANIZATION•The Sole Proprietorship•The Partnership•General Partnership•Limited Partnership•The Corporation1-13A COMPARISON Corporation PartnershipLiquidity and marketabilityShares can be easily exchangedSubject to substantial restrictionsVoting Rights Usually each share gets one voteGeneral Partner is in charge; limited partners may have some voting rightsTaxation Double Partners pay taxes on distributionsReinvestment and dividend payoutBroad latitude All net cash flow is distributed to partnersLiability Limited liability General partners may have unlimited liability; limited partners enjoy limited liabilityContinuity Perpetual life Limited life1-141-15A GLOBAL PHENOMENON•The corporate form of organization is not unique to the United States:1-161.3 THE IMPORTANCE OF CASH FLOWS•If the firm is to prosper, it must:•Buy assets that generate more cash than they cost•Sell financial instruments that raise more cash than they cost•The successful firm generates more cash than it uses1-17THE CONCEPTUAL FLOW OF CASHUltimately, the firm must be a cash generating activity.The cash flows from the firm must exceed the cash flows from the financial markets.1-18CASH FLOW ≠ ACCOUNTING INCOME•Do not confuse cash flow and accounting income•Non-Cash expense example: Depreciation•Non-Cash revenue example: Sales on Account1-191.4 THE GOAL OF FINANCIAL MANAGEMENT•What is the correct goal?•Maximize profit?•Minimize costs?•Maximize market share?•Maximize shareholder wealth?1-201.5 THE AGENCY PROBLEM•Agency relationship•Principal hires an agent to represent his/her interest•Stockholders (principals) hire managers (agents) to run the company•Agency problem•Conflict of interest between principal and agent1-21AGENCY COST•Cost of Conflict of Interest•Example:•Large investment positions firm for long term positive cash flow but has risk in short run•Owners want this investment – Increases firm value•Managers object – Risk may have personal cost•If managers prevail, foregone long term cash flow is the Agency Cost1-22MANAGEMENT GOALS•Management goals may be different from shareholder goals•Expensive perquisites•Survival•Independence•Increased growth and size •Often lead to management reward•Not necessarily in best interest of shareholders1-23MANAGING MANAGERS• Managerial compensation•Incentives can be used to align management and stockholder interests•The incentives need to be structured carefully to make sure that they achieve their intended goal• Corporate control•The threat of a takeover may result in better management• Influence of other stakeholders1-241.6 REGULATION•The Securities Act of 1933 and the Securities Exchange Act of 1934