Chapter 01 – Introduction to Corporate Finance
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Chapter 1
INTRODUCTION TO CORPORATE FINANCE
CHAPTER WEB SITES
Section
Web Address
SUGGESTED VIDEOS
CHAPTER ORGANIZATION
1.1 Corporate Finance and the Financial Manager
1.2 Forms of Business Organization
1.3 The Goal of Financial Management
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1.4 The Agency Problem and Control of the Corporation
Stakeholders
1.5 Financial Markets and the Corporation
1.6 Summary and Conclusions
ANNOTATED CHAPTER OUTLINE
1.1. Corporate Finance and The Financial Manager
A. What Is Corporate Finance?
B. The Financial Manager
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C. Financial Management Decisions
The financial manager is concerned with three primary categories
of financial decisions.
1.2. Forms of Business Organization
A. Sole Proprietorship – A business owned by one person.
B. Partnership – A business with multiple owners, but not
incorporated.
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C. Corporation – A distinct legal entity composed of one or more
owners.
Lecture Tip: Although the corporate form of organization has the
advantage of limited liability, it has the disadvantage of double
D. A Corporation by Another Name…
1.3. The Goal of Financial Management
A. Possible Goals
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B. Other possible goals that students might suggest include
C. The Goal of Financial Management
Lecture Tip: The late Roberto Goizueta, former chairman and
“How Coke is Kicking Pepsi’s Can,” Fortune, October 28, 1996.
Coke focused on soft drinks while Pepsi-Co diversified into other
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remarks in his letter to the shareholders.
Lecture Tip: The validity of this goal assumes “investor
D. A More General Goal – To maximize the market value of owners’
equity.
Ethics Note: Any number of ethical issues can be introduced for
E. Sarbanes-Oxley
1.4. The Agency Problem and Control of the Corporation
A. Agency Relationships – The relationship between stockholders and
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B. Management Goals
Agency costs
direct costs – compensation and perquisites for management
indirect costs – cost of monitoring and sub-optimal decisions
Ethics Note: When shareholders elect a board of directors to
oversee the corporation, the election serves as a control
A group of shareholders filed litigation against the board of
C. Do Managers Act in the Stockholders’ Interests?
Managerial compensation can be used to encourage managers to
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option and stock components. (See The Wall Street Journal,
November 12, 1993, p. B1). However, this may not be the best way
to encourage managers to act in the stockholders’ best interest.
Both of these examples illustrate that carefully crafted
Lecture Tip: According to The National Center for Employee
Ownership, broad based stock option plans have increased
Stockholders technically have control of the firm, and dissatisfied
shareholders can oust management via proxy fights, takeovers, etc.
However, this is easier said than done. Staggered elections for
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Stakeholders are other groups, besides stockholders, that have a
vested interest in the firm and potentially have claims on the firm’s
cash flows. Stakeholders can include creditors, employees, and
customers.
Ethics Note: A discussion of stakeholder interests leads very nicely
Ethics Note: The antitrust case against Microsoft can generate a
healthy discussion of ethical behavior, innovation, and the
The Final Judgment was issued on November 12, 2002, and has
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or licensing any software that competes with Microsoft Platform
The Final Judgment called for the appointment of a technical
1.5. Financial Markets and the Corporation
A. Cash Flows to and from the Firm
Video Note: Financial Markets – This video discusses how capital is raised in financial
markets and shows an open-outcry market at the Chicago Board of Trade.
B. Primary versus Secondary Markets
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Lecture Tip: Students are often curious about the nature of the
”Indian Bingo says in a preliminary registration
statement filed with the Securities and Exchange
Secondary market – the market where securities that have already
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1.6. Summary and Conclusions
Why Share-Owner Value?
At The Coca-Cola Company, our publicly stated mission is to create value over
Why? The answer can be summed up in three reasons.
First, increasing share-owner value over time is the job our economic system
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Please note that I said creating value “over time,” not overnight. Those two
words are at the heart of the third reason behind our mission: Focusing on creating
value over the long term keeps us from acting shortsighted.
The creation of unique value for all stakeholders, including share owners, over
the long haul, presupposes a stable, health society. Only in such an environment can a
Chapter 01 – Introduction to Corporate Finance
The question we ask ourselves now is: What must we do to make a billion Coca-
Colas ago be this morning? By asking that question, we discipline ourselves to the long-
term view.