Fundamentals of Corporate Finance, 11th Edition (Ross, Westerfield, Jordan) Chapter 1 Notes PDF

Preview

Summary

Notes over Fundamentals of Corporate Finance, 11th Edition (Ross, Westerfield, Jordan) Chapter 1. Teacher: David J. Nicol, PhD....

Description

CHAPTER 1 Class Notes  Financial Management Decisions o What long-term investments or projects should the business take on?  Capital Budgeting o Where will we get the long-term financing to pay for the investment?  Capital Structure o How do we manage the day-to-day finances of the firm?  Working capital management  Financial Manager o Financial managers try to answer some or all of these questions o The top financial manager within a firm is usually the Chief Financial Officer (CFO)  Forms of Business Organization o Three major forms in the US  Sole Proprietorship  Partnership  General  Limited (with General Partners)  Corporation  C-Corp  LLC: Limited Liability Company  S-Corp: small business corporation  Sole Proprietorship o Advantages  Easy to start  Least regulated  Single owner keeps all the profits  Taxed once as personal income o Disadvantages  Limited to life of owner  Equity capital limited to owner’s personal wealth  Unlimited liability  Difficult to sell ownership interest  Partnership o Really a sole proprietorship but with more than one owner o Advantages  More than one owner  More capital available  Relatively easy to start  Income taxed once  Corporation o Advantages  Limited liability













 Unlimited life  Separation of ownership and management  Easy transfer of ownership  Easier to raise capital o Disadvantages  Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)  Separation of ownership and management (agency problem) Goal of Financial Management o What should be the goal of corporation?  Maximize profit?  Minimize costs?  Maximize market share? Sarbanes-Oxley Act o Driven by corporate scandals  Enron, Tyco, WorldCom, Adelphia o Intended to strengthen protection against accounting fraud and financial malpractice o Compliance very costly  Firms driven to:  Go public outside the U.S.  Go private (“go dark”) Ethics issues o Is it ethical for tobacco companies to sell a product that is known to be addictive and a danger to the health of the user? Is it relevant that the product is legal? o Should boards of directors consider only price when faced with a buyout offer? o Is it ethical to concentrate only on shareholder wealth, or should stakeholders as a whole be considered? o Should firms be penalized for attempting to improve returns by stifling competition (e.g., Apple? The Agency Problem o Agency relationship  Principal hires an agent to represent his/her interests o Separation of ownership and control Do managers act in the shareholders’ best interests? o 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 o Corporate control  The threat of a takeover may result in better management o Other stakeholders...