Cody Brouwers February 3, 2010 1
Chapter 1 Introduction to Corporate Finance
1.1 Corporate Finance and the Financial Manager
x Financial manager is concerned with 3 types of questions:
1. Capital Budgeting t Process of planning and managing investment in long-term assets.
2. Capital Structure t The mix of debt and equity maintained by the firm.
3. Working Capital Management t Wovv]vPvuvP]vPZ(]u[µvv
1.2 Forms of Business Organization
x Forms of business organization
x Sole Proprietorship t Owned by single individual.
x Partnership t Owned by two or more co-owners.
x Corporation t A distinct legal entity owned by one or more individuals or entities.
x Income Trust t A way to get around double taxation, trusts hold the debt and equity of
an underlying business and distribute the income generated to unit holders.
1.3 The Goal of Financial Management
x Goal of financial management is to maximize the current value per share of existing stock.
1.4 The Agency Problem and Control of the Corp.
x Agency problem t The possibility of conflicts of interest between shareholders and
o Management usually has incentive to increase share value for 2 reasons:
Managerial compensation is usually linked to share value.
Job prospects improve with better performance.
x Corporate Governance t Rules for corporate organization and conduct that are usually laid out
1.5 Financial Markets and the Corp.
x Cash flows between the firm and financial markets:
o Securities are issued (inflow)
o Firm invests in assets (outflow)
o Operations generate cash flow (inflow)
o Then cash is either:
Paid to government in form of taxes
Paid to shareholders and creditors in form of dividends and debt payments
Reinvested back into firm.
x Money Markets t Financial markets where short-term debt securities are bought and sold.