McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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 Value

Does 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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Role of the Financial Manager

Firms Operations
(2) (1)

Investors Financial Manager

(4a)

Real assets
(3) (4b)

Financial Assets 1. Cash raised from investors (how?) 2. Cash invested in firm 3. Cash generated by operations 4A. Cash reinvested in the firm 4B. Cash returned to investors
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The Financial Manager

Most large companies have 3 top-level financial managers:

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Appendix: Careers in Finance

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