1.Chapter1

1-4
LO1
Financial Management Decisions
• Capital budgeting
• What long-term investments or projects should the business take on?
• Capital structure
• How should we pay for our assets? • Should we use debt or equity?
• Maximize shareholder wealth • Maximize share price • Maximize firm value
1-12
LO4
The Agency Problem 1.4
• Agency relationship • Principal hires an agent to represent their interests • Stockholders (principals) hire managers (agents) to run the company • Agency problem • Conflicts of interest can exist between the principal and the agent • Agency costs • Direct agency costs • Indirect agency costs 1-13
• Corporate control
• The threat of a takeover may result in better management
• Conflicts with other stakeholders
1-14
LO5
Social Responsibility and Ethical Investing
1-9
LO2
Income Trust
• Holds the debt and equity of an underlying business. • Distributes the income generated to the unit-holders. Income was not taxed at corporate level. This will change in 2011. • Not a corporation, but unit-holders do have limited liability protection. • Many income trusts are now converting to corporations.
• Working capital management
• How do we manage the day-to-day finances of the firm?
1-5
LO2
Forms of Business Organization 1.2
• Three major forms in Canada
1-7
LO2
Partnership
A business formed by two or more co-owners. • Advantages
• Two or more owners • More human and financial capital available • Relatively easy to start • Income taxed once as personal income
• Does this mean we should do anything and everything to maximize owner wealth?
1-11
LO3
Primary Goal of Financial Management
• Three equivalent goals of financial management:
1-6
LO2
Sole Proprietorship
A business owned by a single individual.
• Advantages
• Easiest to start • Least regulated • Single owner keeps all the profits • Taxed once as personal income
LO4
Managing 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 goal
• Treasurer – oversees cash management, capital expenditures and financial planning • Controller – oversees taxes, cost accounting, financial accounting and data processing
1-3
LO1
Financial Manager
• Financial managers try to answer some or all of these questions • The top financial manager within a firm is usually the Chief Financial Officer (CFO)
• Disadvantages
• Unlimited liability • Limited to life of owner • Equity capital limited to owner’s personal wealth • Difficult to sell ownership interest
• Know the basic types of financial management decisions and the role of the financial manager • Know the financial implications of the different forms of business organization • Know the goal of financial management • Understand the conflicts of interest that can arise between owners and managers • Understand the various types of financial markets and financial institutions • Understand current trends in Canadian financial markets
1-1
Chapter Outline
• • • • Corporate Finance and the Financial Manager Forms of Business Organization The Goal of Financial Management The Agency Problem and Control of the Corporation Financial Markets and the Corporation Financial Institutions Trends in Financial Markets and Financial Management Outline of the Text
1-10
LO3
Goal Of Financial Management 1.3
• What should be the goal of a corporation?
• • • • Maximize profit? Minimize costs? Maximize market share? Maximize the current value of the company’s stock?
1-2
• • •
•
LO1
Corporate Finance 1.1
• Some important questions that are answered using finance
• What long-term investments should the firm take on? • Where will we get the long-term financing to pay for the investment? • How will we manage the everyday financial activities of the firm?
• Investors are increasingly demanding that corporations behave responsibly • Issues include how a corporation treats the community in which it operates, their customers, corporate governance, their employees, the environment and human rights • Controversial business activities include alcohol, gaming, genetic engineering, nuclear power, pornography, tobacco and weapons
• Sole proprietorship • Partnership
• General • Limited
• Corporation
• In other countries, corporations are also called joint stock companies, public limited companies and limited liability companies
• Disadvantages
• Unlimited liability
• General partnership • Limited partnership
• Partnership dissolves when one partner dies or wishes to sell • Difficult to transfer ownership • Possible disagreements between partners 1-8
• Disadvantages
• Separation of ownership and management • Double taxation (income is taxed at the corporate rate and then dividends are taxed at the personal rate)
LO2
Corporation
A business created as a distinct legal entity owned by one or more individuals or entities. • Advantages
• Limited liability • Unlimited life • Separation of ownership and management • Transfer of ownership is easy • Easier to raise capital
Chapter
1
Copyright © 2010 McGraw-Hillroduction To Corporate Finance
Prepared by Anne Inglis, Ryerson University
McGraw-Hill Ryerson
Key Concepts and Skills