Fundamentals of

Chapter 1 Corporate Finance

Fourth Edition

The Firm and The

Financial Manager

Slides by
Matthew Will

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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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Organizing a Business
Sole Partnership Corporation
Proprietorship
Who owns the The manager Partners Shareholders
business?
Are managers No No Usually
and owners
separate?
What is the Unlimited Unlimited Limited
owner’s
liability?
Are the owner No No Y es
& business
taxed
separately?

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Corporate Structure

Sole Proprietorships
Unlimited Liability
Personal tax on profits
Partnerships

Limited Liability

Corporations Corporate tax on profits +

Personal tax on dividends

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The Role of The Financial Manager

(2) (1)
Firm's
Financial
operations (4a) Investors
Manager

Real assets
(3) (4b)

(1) Cash raised from investors

(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors

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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 Nontangible Assets

Euro Disney Gillette’s Mach3 Razor
@ $2 billion @ $300 million

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Who is The Financial Manager?

Chief Financial Officer

Treasurer Controller

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Careers in Finance
Career Annual Salary
Commercial Banking
Loan Officer $ 60,000 +
Department Manager $ 100,000 +

Corporate Finance
Financial Analyst $ 38 - 47,000
Credit Manager $ 30 - 63,000
Chief Financial Officer $ 232 - 295,000

Investment Banking (bulge bracket)

First Year Analyst $ 30 - 110,000
First Year Associate $ 125 - 235,000
Assistant Vice President $ 200 - 600,000
Director/Principal $ 300k - 1.2 mil
Managing Director/Partner $ 400k - 20 mil
Department Head $ 750k - 70 mil

Money Management
Portfolio Manager $ 500,000 +
Bank Trust Department $ 100,000 +

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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 the
conflict 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 Directors
3 - Takeovers
4 - Specialist Monitoring
5 - Auditors

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CEO Pay
CEO Compensation 2001 ($ millions)

Total Earnings from

CEO Name Company Earnings Stock Options
Philip Condit Boeing 2.90 0.00
Sanford Weill Citigroup 34.60 15.90
Gordon Bethune Continental Airlines 4.70 0.00
Michael Dell Dell Computer 201.30 198.70
Michael Eisner Walt Disney 1.00 0.00
Lee Raymond Exxon Mobil 32.70 24.30
Ray Irani Occidental Petroleum 10.90 1.70
Robert Ulrich Target 6.60 2.20
David 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
Click to access web sites
Internet connection required

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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