Financial management
Chapter 1: Goals and Governance of the
corporation
1.Investment and
financing
decisions
Capital Budgeting Decision
Decision to invest in tangible or intangible
assets.
…also called
Investment Decision.
Capital Expenditure (CAPEX) decision.
Financing Decision
Decision on the sources and amounts of financing.
Capital Structure
The mix of long-term debt and equity financing.
Real assets
Assets used to produce goods and services
Financial assets
Financial claims to the income generated by the
firm’s real assets
(look at the PowerPoint chapter 1 slide 9 for exercises)
2.What is a corporation?
Corporation
A business organized as a separate legal entity owned by stockholders.
Types of corporations:
Public companies
Private corporations
Limited liability corporations (LLC)
1
,Types of Business Organizations
Sole proprietorships
Partnerships
Corporations
Limited liability options
o Limited liability partnerships
o Limited liability corporations
o Professional corporations
Limited liability
The owners of a corporation are not personally liable for its obligations
2
, 3.Who is the financial
manager?
Chief financial officer (CFO)
Responsible for the financial policy
and corporate planning.
Treasurer
Responsible for cash management,
raising of capital and banking
relationships.
Controller
Responsible for preparation of financial statements, accounting and taxes.
(1) Cash raised from investors.
(2) Cash invested in firm.
(3) Cash generated by operations.
(4a) Cash reinvested.
(4b) Cash returned to investors.
4.Goals of the corporation
Shareholders desire wealth maximization
Profit maximization
Maximize profits? Which year’s profits?
Earning manipulation.
Opportunity cost of capital
The minimum acceptable rate of return on capital investment is set by the
investment opportunities available to shareholders in financial markets.
The investment Trade-Off
3
Chapter 1: Goals and Governance of the
corporation
1.Investment and
financing
decisions
Capital Budgeting Decision
Decision to invest in tangible or intangible
assets.
…also called
Investment Decision.
Capital Expenditure (CAPEX) decision.
Financing Decision
Decision on the sources and amounts of financing.
Capital Structure
The mix of long-term debt and equity financing.
Real assets
Assets used to produce goods and services
Financial assets
Financial claims to the income generated by the
firm’s real assets
(look at the PowerPoint chapter 1 slide 9 for exercises)
2.What is a corporation?
Corporation
A business organized as a separate legal entity owned by stockholders.
Types of corporations:
Public companies
Private corporations
Limited liability corporations (LLC)
1
,Types of Business Organizations
Sole proprietorships
Partnerships
Corporations
Limited liability options
o Limited liability partnerships
o Limited liability corporations
o Professional corporations
Limited liability
The owners of a corporation are not personally liable for its obligations
2
, 3.Who is the financial
manager?
Chief financial officer (CFO)
Responsible for the financial policy
and corporate planning.
Treasurer
Responsible for cash management,
raising of capital and banking
relationships.
Controller
Responsible for preparation of financial statements, accounting and taxes.
(1) Cash raised from investors.
(2) Cash invested in firm.
(3) Cash generated by operations.
(4a) Cash reinvested.
(4b) Cash returned to investors.
4.Goals of the corporation
Shareholders desire wealth maximization
Profit maximization
Maximize profits? Which year’s profits?
Earning manipulation.
Opportunity cost of capital
The minimum acceptable rate of return on capital investment is set by the
investment opportunities available to shareholders in financial markets.
The investment Trade-Off
3
