The Scope Of Corporate Finance

Professor XXXXX Course Name / Number

Corporate Finance Functions

Capital-Raising (Financing)

Capital Budgeting

Financial Management

Risk Management

Corporate Governance
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The Dimensions of the Capital Raising Function

Primary vs Secondary Market Transactions Or Offerings Funding Via Capital Market vs Via Financial Intermediary Money vs Capital Markets Public vs Private Capital Markets Going Public

Raising Capital: Key Facts

Most Financing from Internal Rather Than External Sources Most External Financing is Debt Banks Declining as a Source of Capital for Large Firms Securities Markets Growing in Importance

Growth in Global Security Issues

1990-2004 ($US Billions)

6000 5000

4000

Global debt & equity

3000

2000

U.S. Issuers worldwide

1000

0 1990

1991 1992

1993

1994 1995

1996

1997 1998

1999 2000

2001

2002 2003

2004

The Capital Budgeting Function

Capital Budgeting the process firms use to choose the set of investments that generate the most wealth for shareholders

The Financial Management Function

Managing Daily Cash Inflows and Outflows Forecasting Cash Balances Building a Long-Term Financial Plan Choosing the Right Mix of Debt and Equity
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The Risk Management Function

Managing the Firms Exposure to Significant Risks Interest Rate Risk Exchange Rate Risk Commodity Price Risk
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The Corporate Governance Function

Ensuring that Managers Pursue Shareholders Objectives Dimensions of Corporate Governance
Board of Directors Ownership Structure Capital Structure Compensation Plan Countrys Legal Environment

Takeover Market Disciplines Firms that Dont Govern Themselves

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Global Mergers and Acquisitions, 1991-2004 ($ Billions)

4000 3500

3000

2500

2000

1500

1000

500

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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U.S. targets

Non-U.S. targets

What Should Managers Maximize?

Problems with Profit Maximization
Does not Account for Timing of Returns Profits - Not Necessarily Cash Flows Ignores Risk

Maximize Shareholder Wealth

Maximize Stock Price, Not Profits Account for Risk As Residual Claimants, Shareholdsers Have Better Incentives to Maximize Firm Value than Other Stakeholders
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Agency Costs In Corporate Finance

Due to Separation of Ownership and Control
Divergence between Interests of Managers & Shareholders

Ways To Deal With Agency Costs

Takeovers, Proxy Contests Monitoring & Bonding Costs Compensation Contracts Controversial Method: Executive Compensation Average S&P 500 CEO Pay in 2001: $9.7 Million
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Forms Of Business Organization In The U.S.

Proprietorship
No Distinction Between Business & Person Easy To Set Up, Operate; Taxed As Personal Income Personal Liability, Limited Life, Difficult To Transfer Two Or More Business Owners Partners - Liable For Every Other Partners Actions One General & Many Limited Partners Limited Liability Of Corporation,Tax Benefits Of Partnership Real-Estate, R&D Comapnies

Partnership

Limited Partnership
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Forms Of Business Organization Corporations

Legal Entity With All the Economic Rights & Responsibilities of a Person Incorporation Occurs At State Level; Based On State Law Strengths - Limited Liability To Investors, Unlimited Business Life

Corporation

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Are there any weaknesses for corporations? YES! Double taxation

The Double Taxation of Dividends

Taxation of Business Income: Corporations vs Partnerships

(Corporate Tax Rate (c) = 0.35; Personal Tax Rate (p) = 0.40)
Corporation Operating income Corporate profits tax (c = 0.35) Net income available for dividends Cash dividends or distributions Personal tax, owner income (p=0.4) After-tax disposable income
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Partnership $100,000 0 100,000 100,000 (40,000) 60,000

$100,000 (35,000) 65,000 65,000 (26,000) $39,000

Non-U.S. Forms Of Business Organization

LimitedLiability Companies StateOwned Enterprise s
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PLC In Britain, SA In Spain, Latin America GMBH or AG In Germany, Austria, Switzerland

Utilities, Airlines, Banks 5% GDP in OECD, 7% in non-OECD Privatization Programs Reduced Role Of SOEs

What amount proceeds from Privatization Programs?

Privatization Proceeds 1988-2004 ($U.S. Billions)

180 160 140 120 100 80 60 40 20 0 1988
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1990

1992

1994

1996

1998

2000

2002

2004

Corporate Form of Organization

Financial Managers Responsible for Maximizing Shareholders Wealth How? Perform the 5 Basic Duties of Corporate Finance
Raising Capital Capital Budgeting Financial Management Risk Management Corporate Governance
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