Introduction to Corporate Finance: Principles and Decisions

1. Business Scholars:Principles of Finance 351 12th Edition 2019 Introduction to Corporate Finance Chapter 1 Richard D. Marcus University of Wisconsin -Milwaukee Spring 2019

2. Corporate Finance Questions that are answered using finance • What long-term investments should the firm take on? • Where will we get the long-term financing to pay for the investment? • How will we manage the everyday financial activities of the firm?

3. Financial Manager • Financial managers try to answer some or all of these questions • The top financial manager within a firm is usually the Chief Financial Officer (CFO) • Treasurer – oversees cash management, credit management, capital expenditures, and financial planning • Controller – oversees taxes, cost accounting, financial accounting and data processing

4. Organizational Chart: Emphasis on the CFO

5. Financial Management Decisions • Capital budgeting • What long-term investments or projects should the business take on? • Capital structure • How should we pay for our assets? • Should we use debt or equity? • Working capital management • How do we manage the day-to-day finances of the firm?

6. Forms of Business Organization • Three primary forms in the United States • Sole proprietorship • Partnership • General • Limited • Corporation • S-Corp • Limited liability company We also have mutual organizations and cooperatives.

7. Advantages Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income Disadvantages Limited to the life of owner Equity capital limited to owner’s personal wealth Unlimited personal liability Difficult to sell ownership interest 1. Sole Proprietorship

8. Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Disadvantages Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership 2. Partnership

9. Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate) 3. Corporation

11. The Goal of Financial Management? • What should be the goal of a corporation? • Maximize profit? • Minimize costs? • Maximize market share? • Maximize the current value of the company’s stock? • Does this mean we should do anything and everythingto maximize owner wealth? • What of illegal activities? • What of social responsibility?

12. Financial Management • Financial Management is planning for the best possible flow of funds within a firm – Prof Marcus says • Textbook: Goal of Financial Management is the maximize the current value per share of the existing stock

13. Cash Flow Graphic follow the money, Page 14 Slide # 11

14. Personal Financial ManagementAn Analogy • Find best ways to make the inflow of funds over time • Work earnings, earned interest and dividends, and gifts and loans • Exceed the outflow of funds • Expenses, debt repayment, taxes, etc. "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” Charles Dickens’ character Wilkins Micawberfrom David Copperfield. • Checking Account & Savings Account • avoid bounced checks by having more in checking, at the expense of interest earned in a savings account • Tradeoff or risk and return, true also for Cash Management.

15. The Agency Problem • Agency relationship • Principal hires an agent to represent his/her interests • Stockholders (principals) hire managers (agents) to run the company • The Agency Problem • Conflict of interest between principal and agent • Agency costs • Direct agency costs– the purchase of something for management that can’t be justified from a risk-return standpoint, and monitoring costs. • Sarbanes-Oxley (Sarbox) for example of a direct agency cost • Indirect agency costs– management’s tendency to forgo risky or expensive projects that could be justified from a risk-return standpoint.

16. Managing Managers • Managerial compensation • Incentives can be used to align management and stockholder interests • The incentives need to be structured carefully to make sure that they achieve their goal • Corporate control • The threat of a takeover may result in better management • Other stakeholders • The firm is a nexus of contracts: buyers, suppliers, employees, management, bondholders, and stockholders

17. An Internet Example • The Internet provides a wealth of information about individual companies • One simple site is http://finance.yahoo.com/ • Click on the web surfer to go to the site, choose the Harley Davidson, HOG, and see what information you can find! • Southwest Airlines (LUV) • Harley - Davidson (HOG) • Starwood Hotels & Resorts (HOT) • American Express (AXP)

18. SOURCE: http://stockcharts.com/h-sc/ui?s=HOG Harley Davidson (NYSE: HOG) Last Trade: $ 33.99 P/E : 9.15 EPS : 3.21 Div. & (Yield): $1.48 ( or 4.37%) https://finance.yahoo.com/quote/HOG?p=HOG

19. Financial Markets • Cash flows diagram in a firm with stakeholders (see slide 11) • Primary vs. secondary markets • For example, an IPO (initial public offering) is a primary market. Trading thereafter is in the secondary market. • Dealervs. auction markets • Listedvs. over-the-counter securities • NYSE • NASDAQ http://www.nyse.com/ http://www.nasdaq.com/

20. Brief Quiz Questions • What are the three types of financial management decisions and what questions are they designed to answer? • What are the three major forms of business organizations? • What is the goal of financial management? • What are agency problems and why do they exist within a corporation? • What is the difference between a primary market and a secondary market?