Managerial Finance
1) Provide an example of the investment and financing decisions that financial managers make.
2) Please identify and describe one (1) of the financial markets.
refer text book
Brealey, Myers and Marcus, Fundamentals of Corporate Finance, 9th Edition, McGraw-Hill Irwin, 2018; ISBN 978-1-259-72261-9
Copyright © 2015 by The McGraw-Hill Companies, Inc. All rights reserved
Chapter 1
Goals and Governance of the Corporation
1- ‹#›
Topics Covered
1.1 Investment and Financing Decisions
1.2 What is a Corporation?
1.3 Who Is the Financial Manager?
1.4 Goals of the Corporation
1.5 Agency Problems, Executive Compensation, and Corporate Governance
1.6 The Ethics of Maximizing Value
1.7 Careers in Finance
1.8 A Preview of Coming Attractions
1.9 Snippets of Financial History
1- ‹#›
3
2
2
2
2
2
Capital Budgeting Decision
Decision to invest in tangible or intangible assets
…also called
the Investment Decision
the Capital Expenditure (CAPEX) decision
Investment and Financing Decisions
1- ‹#›
6
5
5
5
5
5
“Capital Budgeting”
Investment and Financing Decisions
TANGIBLE ASSETS
Southwest Airlines
Purchase new planes
INTANGIBLE ASSETS
GlaxoSmithKline
R&D expenditures
1- ‹#›
6
5
5
5
5
5
Financing Decision
Decision on the sources and amounts of financing
Capital Structure
The mix of long-term debt and equity financing
Investment and Financing Decisions
1- ‹#›
6
5
5
5
5
5
Investment and Financing Decisions
ASSETS
Investment Decision
FIRM
Financing Decision
Debt
Equity
1- ‹#›
6
5
5
5
5
5
Real Assets
Assets used to produce goods and services
Financial Assets
Financial claims to the income generated by the firm’s real assets
Investment and Financing Decisions
1- ‹#›
6
5
5
5
5
5
Are the following capital budgeting or financing decisions?
Intel decides to spend $1 billion to develop a new microprocessor
Volkswagen borrows 350 million euros (€350 million) from Deutsche Bank
Royal Dutch Shell constructs a pipeline to bring natural gas onshore from a production platform in Australia
Avon spends €200 million to launch a new range of cosmetics in European markets
Pfizer issues new shares to buy a small biotech company
Investment and Financing Decisions
1- ‹#›
6
5
5
5
5
5
What Is a Corporation?
Corporation
A business organized as a separate legal entity owned by stockholders
Types of Corporations
Public Companies
Private Corporations
Limited Liability Corporations (LLC)
1- ‹#›
4
3
3
3
3
3
What Is a Corporation?
Types of Business Organizations
Sole Proprietorships
Partnerships
Corporations
Limited Liability Options
Limited Liability Partnerships
Limited Liability Corporations
Professional Corporations
Limited Liability
The owners of a corporation are not personally liable for its obligations
1- ‹#›
4
3
3
3
3
3
What Is a Corporation?
| Sole Proprietorship | Partnership | Corporation | |
| Who owns the business? | The manager | Partners | Stockholders |
| Are managers and owners separate? | No | No | Usually |
| What is the owner’s liability? | Unlimited | Unlimited | Limited |
| Are the owner and business taxed separately? | No | No | Yes |
1- ‹#›
5
4
4
4
4
4
What Is a Corporation?
Partnerships
Sole Proprietorships
Limited Liability
Corporate tax on profits + personal tax on dividends
Corporations
Unlimited Liability
Personal tax on profits
1- ‹#›
Who Is the Financial Manager?
Treasurer
Controller
Chief Financial Officer
1- ‹#›
19
Chief Financial Officer (CFO)
Supervises all financial functions and sets overall financial strategy
Treasurer
Responsible for financing, cash management, and relationships with banks and other financial institutions
Controller
Responsible for budgeting, accounting, and taxes
Who Is the Financial Manager?
1- ‹#›
4
3
3
3
3
3
Financial
Manager
Who Is the Financial Manager?
Firm’s Operations
Real assets
Investors
Financial assets
(1)
(4b)
(4)
(3)
(2)
1- ‹#›
11
10
6
6
6
6
Goals of the Corporation
Shareholders desire wealth maximization
Profit maximization
Maximize profits? Which year’s profits?
Earning manipulation
Opportunity cost of capital
The minimum acceptable rate of return on capital investment is set by the investment opportunities available to shareholders in financial markets
1- ‹#›
17
Goals of the Corporation
The Investment Trade-Off
1- ‹#›
17
Agency Problem
Do managers maximize shareholder wealth or manager wealth?
Mangers have many constituencies “stakeholders”
Stakeholder
Anyone with a financial interest in the corporation
1- ‹#›
17
Agency Problem
Agency problem
Managers are agents for stockholders and are tempted to act in their own interests rather than maximizing value
Agency cost
Value lost from agency problems or from the cost of mitigating agency problems
1- ‹#›
17
Agency Problem
Ownership vs. Management
Difference in Information
Stock prices vs. returns
Dilution of ownership
Dividend policy
Financing decisions
Different Objectives
Managers vs. stockholders
Top managers vs. lower managers
Stockholders vs. banks and lenders
1- ‹#›
Agency Problem
Corporate governance
The laws, regulations, institutions, and corporate practices that protect shareholders and other investors
1- ‹#›
18
Agency Problem
Elements of good corporate governance
Legal requirements
Board of directors
Activist shareholders
Takeovers
Information for shareholders
1- ‹#›
18
Ethics of Maximizing Value
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” –Adam Smith, 1776
Does value maximization justify unethical behavior?
Charles Ponzi
Bernard Madoff
Tyco
Is it ethical?
Short selling
Corporate raiders
Tax avoidance
1- ‹#›
18
Preview of Coming Attractions
How do I calculate the value of a stream of future cash flows?
How do I measure risk?
Where does financing come from?
How do I ensure that the firm’s financial decisions add up to a sensible whole?
What about some of those other responsibilities of the financial manager that you mentioned earlier?
1- ‹#›
18
Snippets of Financial History
1- ‹#›
DateActivity
UnknownCompound growth
1800 b.c.Interest rates
1000 b.c.Options
15th CInternational banking
1650Futures
17th CStock corporations
17th CCurrency
1720New issue speculation
1792NYSE formed
1929Stock market crash
1960Eurodollar market
1971Corporate bankruptcies
1972Financial futures
1986Capital investment decisions
1988Mergers
1993Inflation
1780 & 1997Inflation securities
1993Controlling risk
1999The Euro
2002Financial scandals
2007-2009Subprime mortgages
2011Sovereign debt defaults
Sheet1
| Date | Activity |
| Unknown | Compound growth |
| 1800 b.c. | Interest rates |
| 1000 b.c. | Options |
| 15th C | International banking |
| 1650 | Futures |
| 17th C | Stock corporations |
| 17th C | Currency |
| 1720 | New issue speculation |
| 1792 | NYSE formed |
| 1929 | Stock market crash |
| 1960 | Eurodollar market |
| 1971 | Corporate bankruptcies |
| 1972 | Financial futures |
| 1986 | Capital investment decisions |
| 1988 | Mergers |
| 1993 | Inflation |
| 1780 & 1997 | Inflation securities |
| 1993 | Controlling risk |
| 1999 | The Euro |
| 2002 | Financial scandals |
| 2007-2009 | Subprime mortgages |
| 2011 | Sovereign debt defaults |
Sheet2
Sheet3
"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"
