corporate finance chapter1.docx

1、corporate finance chapter1Chapter 1The Financial Manager and the FirmLearning Objectives1. Identify the key financial decisions facing the financial manager of any business firm.2. Identify the basic forms of business organization used in the United States, and review their respective strengths and

2、weaknesses.3. Describe the typical organization of the financial function in a large corporation.4. Explain why maximizing the current value of the firms stock price is the appropriate goal for management.5. Discuss how agency conflicts affect the goal of maximizing stockholder wealth.6. Explain why

3、 ethics is an appropriate topic in the study of corporate finance.I. Chapter Outline1.1 The Role of the Financial ManagerA. Its All about Cash Flows The financial manager is responsible for making decisions that are in the best interest of the firms owners. A firm generates cash flows by selling the

4、 goods and services produced by its productive assets and human capital. After meeting its obligations, the firm can pay the remaining cash, called residual cash flows, to the owners as a cash dividend, or it can keep the money and reinvest the cash in the business. A firm is unprofitable when it fa

5、ils to generate sufficient cash flows to pay operating expenses, creditors, and taxes. Firms that are unprofitable over time will be forced into bankruptcy by their creditors. In bankruptcy, the company will be reorganized, or the companys assets will be liquidated, whichever is more valuable. If an

6、ything is left after all creditor and tax claims have been satisfied, which usually does not happen, the remaining cash, or residual, is distributed to the owners.B. Three Fundamental Decisions in Financial Management The capital budgeting decision: Which productive assets should the firm buy? This

7、the most important decision because they drive the firms success or failure. The financing decision: How should the firm finance or pay for assets? Working capital management decisions: How should day-to-day financial matters be managed so that the firm can pay its bills, and how should surplus cash

8、 be invested?1.2 Forms of Business OrganizationA. A sole proprietorship is a business owned by one person. There is also no legal distinction between personal and business income for a sole proprietor. All business income is taxed as personal income. A sole proprietor is responsible for paying all t

9、he firms bills and has unlimited liability for all business debts and other obligations of the firm.B. A partnership consists of two or more owners joined together legally to manage a business. A general partnership has the same basic advantages and disadvantages as a sole proprietorship. When a tra

10、nsfer of ownership takes place, such as when a partner wants to sell out, the partnership is terminated, and a new partnership is formed. o The problem of unlimited liability can be avoided in a limited partnership where there must still be a general partner with unlimited liability.C. Corporations

11、are legal entities authorized under a state charter. In a legal sense, it is a “person” distinct from its owners. The owners of a corporation are its stockholders, or shareholders. A major advantage of the corporate form of business is that stockholders have limited liability for debts and other obl

12、igations of the corporation. A major disadvantage of corporate organization is taxes. o The owners of corporations are subject to double taxationfirst at the corporate level and then at the personal level when dividends are paid to them. Some operate as a public corporation, which can sell their deb

13、t or equity in the public securities markets. Others operate as a private corporation, where the common stock is often held by a small number of investors, typically the management and wealthy private backers.D. Hybrid Forms of Business Organization Limited liability partnerships (LLPs) combine the

14、limited liability of a corporation with the tax advantage of a partnershipthere is no double taxation. Limited liability companies (LLCs) Professional corporations (PCs) 1.3 Managing the Financial Function A. The Chief Executive Officer Has the ultimate management responsibility and decision-making

15、power in the firm. Reports directly to the board of directors, which is accountable to the companys owners. B. The Chief Financial Officer Has the responsibility for seeing that the best possible financial analysis is presented to the CEO, along with an unbiased recommendation. The CFOs Key Financia

16、l Reportso The controller typically prepares the financial statements, oversees the firms financial and cost accounting systems, prepares the taxes, and works closely with the firms external auditors.o The treasurer looks after the collection and disbursement of cash, investing excess cash so that i

17、t earns interest, raising new capital, handling foreign exchange transactions, and overseeing the firms pension fund managers.o The internal auditor is responsible for in-depth risk assessments and for performing audits of areas that have been identified as high-risk areas, where the firm has the po

18、tential to incur substantial losses.C. External Auditors Provide an independent annual audit of the firms financial statements.o Ensure that the financial numbers are reasonably accurate and that accounting principles have been consistently applied year to year and not in a manner that significantly

19、 distorts the firms performance.D. The Audit Committee Approves the external auditors fees and engagement letter. The external auditor cannot be fired or terminated without the audit committees approval.1.4 The Goal of the Firm A. What Should Management Maximize? Minimizing risk or maximizing profit

20、s without regard to the other is not a successful strategy. B. Why Not Maximize Profits? To a skilled accountant, however, a decision that increases profits under one set of accounting rules can reduce it under another. Accounting profits are not necessarily the same as cash flows. The problem with

21、profit maximization as a goal is that it does not tell us when cash flows are to be received. Profit maximization ignores the uncertainty or risk associated with cash flows. C. Maximizing the Value of the Firms Stock Price When analysts and investors determine the value of a firms stock, they consid

22、er:1. the size of the expected cash flows, 2. the timing of the cash flows, and 3. the riskiness of the cash flows. Thus, the mechanism for determining stock prices overcomes all the cash-flow objections we raised with regard to profit maximization as a goal. D. Can Management Decisions Affect Stock

23、 Prices? Yes, management makes a series of decisions when executing the firms strategy that affect the firms cash flows and, hence, the price of the firms stock.1.5 Agency Conflicts: Separation of Ownership and Control A. Ownership and Control For a large corporation, the ownership of the firm is sp

24、read over a huge number of shareholders and the firms owners may effectively have little control over management where management may make decisions that benefit their self-interest rather than those of the stockholders. B. Agency Relationships An agency relationship arises whenever one party, calle

25、d the principal, hires another party, called the agent, to perform some service or represent the principals interest. C. Do Managers Really Want to Maximize Stock Price? Shareholders own the corporation, but managers control the money and have the opportunity to use it for their own benefit. D. Agen

26、cy Costs The costs of the conflict of interest between the firms owners and its management. E. Aligning the Interests of Management and Stockholders Management Compensation: A significant portion of management compensation is tied to the performance of the firm, usually to the firms stock price. Con

27、trol of the Firm: If the interests of the manager and the firm are not aligned, then eventually the firm will underperform relative to its true potential, and the firms stock price will fall below its maximum potential price. With its stock underpriced, the firm will become a prime target for a take

28、over by so-called corporate raiders or by other corporate buyers. Management Labor Marketo Firms that have a history of poor performance or a reputation for “shady operations” or unethical behavior have difficulty hiring top managerial talent.o The penalty for extremely poor performance or a crimina

29、l conviction is a significant reduction in the managers lifetime earnings potential. Managers know this, and the fear of such consequences helps keep them working hard and honestly. An Independent Board of Directors : Regulators believe one of the primary reasons for misalignment between board membe

30、rs and stockholders interests is the lack of board independence.F. Sarbanes-Oxley and other regulatory reforms include Greater board independence Internal accounting controls Compliance programs Ethics program Expansion of audit committees oversight powers1.6 The Importance of Ethics in Business A.

31、Business ethicsa societys ideas about what actions are right and wrong.B. Are Business Ethics Different? Studies suggest that traditions of morality are very relevant to business and to financial markets in particular. Corruption in business creates inefficiencies in an economy, inhibits the growth

32、of capital markets, and slows a countrys rate of economic growth. C. Types of Ethical Conflicts in Business Conflicts of Interestoccur when a conflict arises between a persons personal or institutional gain and the obligation to serve the interest of another party. Information Asymmetryoccurs when one party in a business transaction has information that is unavailable t