CHAPTER 1

INTRODUCTION TO CORPORATE FINANCE

SEPTEMBER
2019
LEARNING
OBJECTIVES

• TYPES OF FINANCIAL MANAGEMENT

LO1 • ROLE OF THE FINANCIAL MANAGER

LO2 • GOAL OF FINANCIAL MANAGEMENT

• FINANCIAL IMPLICATIONS OF DIFFERENT FORMS OF

LO3 BUSINESS ORGANIZATION

LO4 • CONFLICT OF INTEREST (MANAGERS AND OWNERS)

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 How will you
manage your WHAT IS  What long-term
everyday CORPORAT investment
financial E FINANCE? should you take
activities such on?
as collecting
from
customers
and paying  Where will you
suppliers? get the long-term
financing to pay
for your
investment?
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 Answer all/some of the
three questions above

Chief Financial Officer

(CFO)

– cash management
- credit management
Treasure - capital expenditure
r - financial planning

 Taxes
Controlle  Cost accounting
r  Financial
accounting 4
 Data processing
 How do we
manage the day-
Working to-day finances of
capital
management the firm

Capital
Capital budgeting
structure
FINANCIAL
MANAGEMENT
DECISIONS

 How should we What long term

pay our investments or
projects should
assets?
the business take
 Should we use on?
debt or equity? 5
 Corporation
* Limited liability company

Sole Proprietorship
FORMS OF
BUSINESS
ORGANIZATION

Partnership
* General
* Limited
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Partnership
• General Sole
• Limited Proprietorship
Forms of
business
organization

Corporation
 Limited liability
company

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 Advantages Disadvantages

PROPRIETORSHIP
Easy to start Limited to life of
owner
SOLE

Equity capital
Least regulated limited to owner’s
personal wealth

Keeps all the

Unlimited liability
profits

Difficult to sell
Taxed once as
ownership
personal income
interest

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 ADVANTAGES DISADVANTAGES

PARTNERSHIP

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ADVANTAGES CORPORATION
 Limited liability Double taxation

DISADVANTAGE
Unlimited life (income taxed at
 Separation of the corporate rate
ownership and and then
management dividends taxed at
Transfer of the personal rate)
ownership is
easy
 easier to raise

S
capital 10
 Maximize
profit?

Maximize
costs?

MAXIMIZE
SHAREHOLDE Maximize
RS’/OWNERS’ market
WEALTH share?

Maximize the
current value of the
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company’s stock?
 AGENCY RELATIONSHIP

HIRE

CONFLICT OF INTEREST

AGENCY PROBLEM
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 Managerial
MANAGING compensati • Incentives
MANAGERS on

Corporate • The threat of

control a takeover

Other stakeholders
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FIRM CASH FLOWS

14
FINANCIAL BU
MARKETS Y

TYPES

Primary Secondary
markets markets

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