Professional Documents
Culture Documents
CORPORATE FINANCE
Topics Covered
Corporate Investment and Financing Decisions The Role of the Financial Manager and the Opportunity Cost of Capital Goals of the Corporation Agency Problems and Corporate Governance
Financial Assets
Financial claims to the income generated by the firms real assets.
Financing decision
sale of financial assets
also called the Investment Decision also called Capital Expenditures or (CAPEX)
(26,289 billion)
Wal-Mart ($379billion)
(1)
Financial
(4a)
markets
(3)
(1) Cash raised from investors (2) Cash invested in firm
(4b)
(3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Treasurer
Controller
2. A company may be able to increase future profits by cutting this years dividend and investing the freed-up cash in the firm. That is not in the shareholders best interest if the company earns less than the opportunity cost of capital. Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
3 17 22 71 76 40 60 80
97 83 78 29 24 20
100
120
% of responses
3 40 41
97 60 59 89 89 40 60 80 100 120
11 11 20
% of responses
Agency Problem
Ownership vs. Management
Agency Problem
Agency costs are incurred when:
1. managers do not attempt to maximize firm value and 2. shareholders incur costs to monitor the managers and constrain their actions.
Agency Problem
Agency Problems
Managers, acting as agents for stockholders, may act in their own interests rather than maximizing value.
Stakeholder
Anyone with a financial interest in the firm.
Agency Problem
Tools to Ensure Management Pays Attention to the Value of the Firm
Mangers actions are subject to the scrutiny of the board of directors. Shirkers are likely to find they are ousted by more energetic managers. Financial incentives such as stock options
Agency Problem
Agency Problem and Corporate Governance Solutions 1. Legal and Regulatory Requirements 2. Compensation plans 3. Board of Directors 4. Monitoring 5. Takeovers 6. Shareholder pressure
Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Web Resources
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www.corpgov.net www.thecorporatelibrary.com
www.riskmetrics.com