Week1 Corpfin Intro
CHAPTER
1
1-0
Introduction to
Corporate Finance
GOALS AND GOVERNANCE OF
THE CORPORATION
This chapter introduces the corporation, its goals, and the roles of financial managers.
Number of Firms in the U.S.
Size of Payroll (000s)
Corporation
1.011.9
73
1.292.0
81
622.908
2.584.4
27
SCorporation
Partnership
$1.068.232.09
5
$2.808.013.07
9
$479.673.700
$149.121.474
Source: U.S. Census 2008 SUSB Annual Data
1-1
WHAT IS A CORPORATION?
Corporation-A business organized as a separate legal entity owned by stockholders.
Types of Corporations:
• Public Corporations
• Private Corporations
1-2
BENEFITS OF THE CORPORATION
Limited liability
Infinite lifespan
Ease of raising capital
1-3
DRAWBACKS OF THE
CORPORATION
Corporations face the problem of double taxation
Improper corporate structures may lead to “Agency
Problems”
1-4
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
1-5
INVESTMENT AND FINANCING
DECISIONS
The Investment Decision
• Real Assets
The Financing Decision
• Financial Assets
1-6
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.
1-7
WHAT IS CORPORATE FINANCE?
Corporate Finance addresses the following three questions:
What long-term investments should the firm engage in?
How can the firm raise the money for the required investments?
How much short-term cash flow does a company need to pay its bills? 1-8
1.
2.
3.
THE BALANCE-SHEET MODEL
OF THE FIRM
Total Value of Assets:
Current
Assets
Total Firm Value to Investors:
Current
Liabilities
Long-Term
Debt
Fixed Assets
2 Intangible
Shareholders’
Equity
1-9
1 Tangible
THE BALANCE-SHEET MODEL
OF THE FIRM
1
1-0
Introduction to
Corporate Finance
GOALS AND GOVERNANCE OF
THE CORPORATION
This chapter introduces the corporation, its goals, and the roles of financial managers.
Number of Firms in the U.S.
Size of Payroll (000s)
Corporation
1.011.9
73
1.292.0
81
622.908
2.584.4
27
SCorporation
Partnership
$1.068.232.09
5
$2.808.013.07
9
$479.673.700
$149.121.474
Source: U.S. Census 2008 SUSB Annual Data
1-1
WHAT IS A CORPORATION?
Corporation-A business organized as a separate legal entity owned by stockholders.
Types of Corporations:
• Public Corporations
• Private Corporations
1-2
BENEFITS OF THE CORPORATION
Limited liability
Infinite lifespan
Ease of raising capital
1-3
DRAWBACKS OF THE
CORPORATION
Corporations face the problem of double taxation
Improper corporate structures may lead to “Agency
Problems”
1-4
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
1-5
INVESTMENT AND FINANCING
DECISIONS
The Investment Decision
• Real Assets
The Financing Decision
• Financial Assets
1-6
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.
1-7
WHAT IS CORPORATE FINANCE?
Corporate Finance addresses the following three questions:
What long-term investments should the firm engage in?
How can the firm raise the money for the required investments?
How much short-term cash flow does a company need to pay its bills? 1-8
1.
2.
3.
THE BALANCE-SHEET MODEL
OF THE FIRM
Total Value of Assets:
Current
Assets
Total Firm Value to Investors:
Current
Liabilities
Long-Term
Debt
Fixed Assets
2 Intangible
Shareholders’
Equity
1-9
1 Tangible
THE BALANCE-SHEET MODEL
OF THE FIRM