chap001
TRANSCRIPT
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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
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Goals and Governance of the Corporation
This chapter introduces the corporation, its goals, and the roles of financial managers.
Source: U.S. Census 2008 SUSB Annual Data
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Investment and Financing Decisions
The Investment Decision
Real Assets
The Financing Decision
Financial Assets
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Investment and Financing Decisions
Are the following capital budgeting or financing decisions?
Apple decides to spend $500 million to develop a new iPhone.
GE borrows $400 million from bond investors.
Microsoft issues 100 million shares to buy a small technology company.
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What is a Corporation?
Corporation-A business organized as a separate legal entity owned by stockholders.
Types of Corporations: Public Corporations Private Corporations
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Benefits of the Corporation
Limited liability
Infinite lifespan
Ease of raising capital
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Drawbacks of the Corporation
Corporations face the problem of double taxation
Improper corporate structures may lead to “Agency Problems”
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Goals of The Corporation
Shareholders want wealth maximization
Wealth maximization vs. profit maximization:
Pitfall: Profits from which period?
Pitfall: Cutting dividends to increase cash reserves
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The Ethics of Maximizing ValueDoes value maximization justify unethical behavior?
Recent examples:
Enron
WorldCom
Bernard Madoff
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Agency Problem
Do managers really maximize value? Agency Problems
• Managers are agents for stockholders, but the managers may act in their own interests rather than maximizing value
Shareholders vs. Stakeholders
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Agency Problem
Different Information Stock prices vs. returns
Dividend Policy
Financing Decisions
Different Objectives Managers vs.
shareholders Top managers vs. lower
managers Stockholders vs. banks
and lenders
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Agency Problem Solutions
Compensation plans
Board of Directors
Blockholders
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Agency Problem Solutions
Takeovers
Specialist Monitoring
Legal and Regulatory Requirements
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4A. Cash reinvested in the firm4B. Cash returned to investors
Role of the Financial Manager
FinancialManager
(1)(2)
(3)
(4a)
(4b)Real assets
Investors
Financial Assets
Firm’sOperations
1. Cash raised from investors (how?)2. Cash invested in firm3. Cash generated by operations
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The Financial ManagerMost large companies have 3 top-level financial managers:
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Appendix: Careers in Finance