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Chapter 1Fundamentals of

Corporate Finance

Fourth Edition

The Firm and TheFinancial Manager

Slides by

Matthew Will

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Topics Covered

Organizing a Business

The Role of The Financial Manager

Who Is The Financial Manager? Goals of the Corporation

CEO Pay

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Organizing a Business

Types of Business Organizations

Sole Proprietorships

Partnerships

Corporations

Hybrids

Limited Partnerships

LLP

LLC

PC

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Sole

Proprietorship

Partnership Corporation

Who owns the

business?

The manager Partners Shareholders

Are managersand owners

separate?

No No Usually

What is the

owners

liability?

Unlimited Unlimited Limited

Are the owner

& business

taxed

separately?

No No Yes

Organizing a Business

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Corporate Structure

Sole Proprietorships

Corporations

Partnerships

Limited Liability

Corporate tax on profits +

Personal tax on dividends

Unlimited Liability

Personal tax on profits

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Financial

Manager

Firm's

operationsInvestors

(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 Manager

Real assets

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The Role of The Financial Manager

Capital Budgeting Decision

Buy real assets that are worth more than they

cost

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The Role of The Financial Manager

Capital Budgeting

Tangible Assets

Euro Disney

@ $2 billion

Nontangible Assets

Gillettes Mach3 Razor

@ $300 million

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Who is The Financial Manager?

Chief Financial Officer

Treasurer Controller

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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 theconflict 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

Arthur Andersen example

Salomon Brothers example

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Goals of The Corporation

Agency Problem Solutions

1 Compensation plans

2 Board of Directors3 Takeovers

4 Specialist Monitoring

5 Auditors

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CEO Pay

CEO C a 200 $

CEO Name Company

Total

Earnings

Earnings from

Stock Options

Philip Condit Boeing 2.90 0.00

Sanford Weill Citigroup 34.60 15.90Gordon Bethune Continental Airlines 4.70 0.00

Michael Dell Dell Computer 201.30 198.70

Michael Eisner Walt Disney 1.00 0.00

ee Raymond Exxon Mobil 32.70 24.30

Ray Irani Occidental Petroleum 10.90 1.70

Robert Ulrich Target 6.60 2.20David Bernaner Walgreen 2.20 0.79

Donald Graham Washington Post 1.10 0.00

Steven Rogel Weyerhauser 2.10 0.00

source: www.forbes.com/ceos

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Web Resources

www.financewise.com

www.businessweek.com

www.fortune.com

www.fei.org

www.fma.org/Student/studentindex.htm

www.wetfeet.com/asp/home.asp

www.corpgov.net

www.careers-in-finance.com

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