Chapter 1

Corporate finance

• Financial manager: STOCKHOLDER of the corporations but not directly involved in business decisions

• Organizational chart:

  

• Financial management decisions

  • Capital budgeting: the process of planning and managing a firm’s long term investments

    • Important for businesses to consider size, timing, and risk of future cash flows

  • capital structure: the specific mixture of long term debt and equity the firm uses to finance its operations

    • Two concerns:

      • How much should the firm borrow?

      • what are the least expensive sources of funds for the firm?

    • Working capital: a firm’s short term assets, such as inventory, and its short term liabilities, such as money owed to suppliers.

Forms of business organization

• Sole proprietorship: owned by one person

  • keeps all the profits

  • limited to the owner’s lifes span

• Partnership: there are two or more owners (partners)

  • all partners share in gains and loses

  • can be held responsible for all partnership debts

• Corporation: a legal “person” separate and distinct from its owners, and it has many of the rights, duties, and privileges of an actual person.

Goal of financial management

• Survive

• avoid financial distress and bankruptcy

• beat the competition

• maximize sales or market share

• minimize costs

• maximize profits

• maintain steady earnings growth

The agency problem and control of the corporation

• The relationship between stockholders and management is called agency relationship.

  • there is a possibility of conflict of interest between the principal and the agent, this is called an agency problem.

• management goals:

  • Agency costs: the costs of the conflict of interest between stockholders and management