ch 1 Corporate Finance: Firm Structures, Management, and Agency Problems

Finance

Allocation, investment, and management of funds and assets with the goal of financial stability and wealth maximization.

Financial Management (Corporate Finance)

How firms allocate resources, raise capital, and make investment decisions.

Capital Markets

The marketplace for securities (stocks, bonds, derivatives) where financing actually happens.

Investments

How to value securities, build portfolios, and balance risk vs. return.

Sole Proprietorship

One owner, unlimited liability, dissolves at death/exit, taxed personally.

Partnership

Multiple owners, shared liability (each partner can be on the hook for the full debt), taxed personally.

LLC/LLP

Limited liability, flexible management, taxed personally (pass-through).

Corporation

Separate legal entity, limited liability, easy transfer of shares, unlimited life, double taxation.

Board of Directors

The governing body that oversees the CEO.

CEO

Chief Executive Officer, responsible for overall management of the firm.

CFO

Chief Financial Officer, oversees accounting, treasury, capital budgeting, investor relations, credit, legal.

Investment Decisions

Decisions regarding which projects/assets to fund.

Financing Decisions

Decisions on how to pay for projects/assets—debt, equity, retained earnings.

Short-term Liquidity Management

Management of cash and working capital.

Maximize Shareholder Wealth

Goal of financial management to increase stock price.

Agency Problem

Tension between principals (owners/shareholders) and agents (managers).

Conflicts in Agency Problem

Empire building, short-term focus, risk aversion.

Solutions to Agency Problem

Compensation tied to stock price, shareholder activism/intervention, threat of firing/takeover.

ESG Metrics

Environmental, Social, Governance metrics used to judge firms on sustainability, ethics, governance.

Skills of a Financial Manager

Analytical thinking, communication, attention to detail, math competency, organizational ability.

Financial Calculators

Tools used for core concepts like time value of money.

Excel/Google Sheets

Software used for financial modeling.

Time Value of Money

A foundational concept in finance.

Professional communication

Emails should be business-like.

Attendance + random quizzes

Part of grade.

Midterm 1

Covers Chapters 1-5, scheduled for September 30.

Midterm 2

Covers Chapters 6-11, scheduled for late October/November.

Final exam

Comprehensive, covers everything.

Calculator

Mandatory, TI BA II Plus type.

Career fair attendance

Encouraged for exposure, even early in degree.

Shareholders

True owners of the corporation.

COO (Chief Operating Officer)

Oversees operations including marketing, HR, and production.

Liquidity Management

Managing working capital to ensure bills and salaries can be paid.

Empire building

Managers expand firms to increase personal power.

Short-termism

Managers focus on quarterly results instead of long-term growth.

Risk aversion

Avoidance of risky but profitable projects.

Align pay with long-term goals

Stock options.

Shareholder intervention/activism

Actions taken by shareholders to influence management.

Threat of takeover

Possibility of a company being acquired by another.

Example of Yahoo buying Tumblr

Yahoo bought Tumblr for $1.1B, selling for $3M years later → seen as empire building.

Goal of financial management

Maximize shareholder wealth.

Social and environmental accountability

Concerns related to ESG (Environmental, Social, and Governance).

Long-term shareholder value

Often aligns with social responsibility.

Understanding Diversity

Variety of human differences, including visible & invisible characteristics.

Key Dimensions of Diversity

Primary (race, gender, age, ethnicity, physical ability) and Secondary (education, income, religion, marital status, experience).

Diversity vs. Inclusion

Diversity = who is present; Inclusion = how they are valued.

Benefits of Diversity

Better decision-making, increased innovation & creativity, broader perspectives.

Challenges of Diversity

Miscommunication, bias & stereotypes, conflict if not managed.

Phase 1: Defining Diversity

Inclusive but not overly individualized; forces reflection on meaning & scope.

Phase 2: Exploring Impact

Individual level (identity, belonging), Group level (team dynamics, collaboration), Organizational level (policies, culture).

Phase 3: Managerial Implications

Leaders shape diversity/inclusion outcomes; ethical responsibility & fairness; competitive advantage.

Learning Outcomes

Recognize multiple dimensions of diversity; apply frameworks to real-world contexts.

Connections Between Part 1 & Part 2

Definitions (Part 1) feed into Phase 1 (Part 2). Dimensions (Part 1) explored at individual, group, org levels (Part 2). Benefits & Challenges (Part 1) addressed through managerial strategies (Part 2). Inclusion concept (Part 1) reinforced in organizational responsibility (Part 2).

Separation of Parts

Part 1 = Foundations → what diversity is, why it matters. Part 2 = Framework → how to think, analyze, and manage diversity systematically.

corporate

used in a company

goal

maximizing wealth

Management

corporate how to effectively allocate resources, limited funds and allocate and achieve a goal

ADVANTAGE of Proprietorships & Partnerships

Easy to form, Few regulations, Power to control company (when to open), No corp income tax

DISADVANTAGE of Proprietorships & Partnerships

Negotiating shares, Hard to raise capital (Unlikely to get loans), Unlimited liability (can get sued and personal and company money will be at risk), Limited lifetime

Advantages of Corps

Unlimited life (if one shareholder leaves there's still some left and more to join), Easy transfer ownership, Limited liability, Ease capital

Disadvantage of Corps

Double tax (sharing dividends), Setup cost and legal support & report filing, Loss of control (dilute sales) owner may lose power

Objective of Financial Management

Investment decisions, financial decisions, Managing short term cash needs

SP EX

Make financial decisions, state up costs, Loans

Manage cash needs

Manages cash flow for fixed cost including rent, loan repayment, and Variable cost including buying ingredients, paying staff

Investment decisions in Corp

collaborations to plan developments, Acquiring startups

Financial decisions in Corp

raise funds (from stock market OR loans in a costly way)

Manage cash in Corp

oversee management of working capital

Shareholder conflict

Managerial compensation packages (stock option IF company performs well in a certain time they'll give packages), Intervention by shareholder (welcome warning if not performing well, pressure to perform), threat of firing (high pressure for performance), Threat of takeover (investor to boost performance)

Shareholder interest & society interest

goal: max stock price & wealth management