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