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.
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.
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
Source: U.S. Census 2008 SUSB Annual Data
1-2
Contents
1.1 Investment and Financing Decisions 1.2 What is a Corporate? 1.3 Who is the Financial Manager? 1.4 Goals of the Corporate 1.5 Careers in Finance
shareholders Top managers vs. lower
managers Stockholders vs. banks
and lenders
1-12
Agency Problem Solutions
Compensation plans Board of Directors Blockholders
Types of Corporations:
Public Corporations Private Corporations
1-6
Benefits of the Corporation
Limited liability Infinite lifespan Ease of raising capital
Shareholders vs. Stakeholders
1-11
Agency Problem
Different Information Stock prices vs. returns
Dividend Policy
Financing Decisions
Different Objectives Managers vs.
(2)
(1)
Investors
Financial
Manager
(4a)
Financial
Assets
(3)
(4b)
1. Cash raised from investors (how?) 2. Cash invested in firm 3. Cash generated by operations 4A. Cash reinvested in the firm 4B. Cash returned to investors
1-13
Agency Problem Solutions
Takeovers Specialist Monitoring Legal and Regulatory Requirements
1-14
Role of the Financial Manager
Firm’s Operations
Real assets
Shareholders want wealth maximization Wealth maximization vs. profit maximization:
Pitfall: Profits from which period? Pitfall: Cutting dividends to increase cash reserves
1-9
The Ethics of Maximizing Value
Does value maximization justify unethical behavior?
Recent exampபைடு நூலகம்es:
Enron
WorldCom
Bernard Madoff
1-10
Agency Problem
Size of Payroll (000s)
1,011,97 3
1,292,08 1
622,908
2,584,42 7
Corporation
S-Corporation
Partnership
Sole Proprietorship
$1,068,232,095 $479,673,700
$2,808,013,079 $149,121,474
Microsoft issues 100 million shares to buy a small technology company.
1-5
What is a Corporation?
Corporation-A business organized as a separate legal entity owned by stockholders.
1-7
Drawbacks of the Corporation
Corporations face the problem of double taxation
Improper corporate structures may lead to “Agency Problems”
1-8
Goals of The Corporation
1-3
Investment and Financing Decisions
The Investment Decision
Real Assets
The Financing Decision
Financial Assets
1-4
Investment and Financing Decisions