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Chapter 1Fundamentals of
Corporate Finance
Fourth Edition
The Firm and TheFinancial Manager
Slides by
Matthew Will
Irwin/McGraw Hill Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved
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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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