Chapter 1: Goals and Governance of the Corporation Chapter 1 Learning Objectives 1. Give examples of the investment and financing decisions that financial managers make. 2. Distinguish between real and financial assets. 3. Cite some of the advantages and disadvantages of organizing a business as a corporation. 4. Describe the responsibilities of the CFO, treasurer, and controller. 5. Explain why maximizing market value is the logical financial goal of the corporation. 6. Explain why value maximization is not inconsistent with ethical behavior. 7. Explain how corporations mitigate conflicts and encourage cooperative behavior. Goals and Governance of the Corporation This chapter introduces the corporation, its goals, and the roles of financial managers. Chapter 1 Outline · Investment and Financing Decisions · The Corporation · The Financial Managers · Goals of the Corporation · Value Maximization · Corporate Governance Note: What are the primary differences among the various legal forms of business? Investment and Financing Decisions · The Investment Decision · Real Assets · The Financial Assets · Financial Assets The Investment Decision– Decision to invest in tangible or intangible assets. Also known as the “capital budgeting” or “CAPEX” decision. The Financing Decision– The form and amount of financing of a firm’s investments. Real Assets– Assets used to produce goods and services. Financial Assets– Financial claims to the income generated by the firm’s real assets. Are the following capital budgeting or financing decisions? · Apple decides to spend $500 million to develop a new iPhone. · GE borrows $400 million from bond investors. · Microsoft issues 100 million shares to buy a small technology company. · When Apple spends $500 million to develop a new iPhone it is investing in real assets and is making a capital budgeting decision. · When GE borrows $400 million from bond investors it is investing in financial assets and is making a financing decision. · When Microsoft issues 100 million shares to buy a smaller company it is investing in both financial and real assets. It is making both a capital budgeting and financing decision. What is a Corporation? · Corporation-A business organized as a separate legal entity owned by stockholders. · Types of Corporations: · Public Corporations · Private Corporations Corporation – A business organized as a separate legal entity owned by stockholders. Public Company – A corporation whose shares are traded in public markets such as the New York Stock Exchange or NASDAQ. Private Corporation – A corporation whose shares are not traded publicly. Benefits of the Corporation · Limited liability · Infinite lifespan · Ease of raising capital Limited Liability – The owners of a corporation are not personally liable for its obligation. Drawbacks of the Corporation · Corporation face the problem of double taxation · Improper corporate structures may lead to “Agency Problem” Double Taxation– Corpor ...

1. Chapter 1: Goals and Governance of the Corporation
Chapter 1 Learning Objectives
1. Give examples of the investment and financing decisions that
financial managers make.
2. Distinguish between real and financial assets.
3. Cite some of the advantages and disadvantages of organizing
a business as a corporation.
4. Describe the responsibilities of the CFO, treasurer, and
controller.
5. Explain why maximizing market value is the logical financial
goal of the corporation.
6. Explain why value maximization is not inconsistent with
ethical behavior.
7. Explain how corporations mitigate conflicts and encourage
cooperative behavior.
Goals and Governance of the Corporation
This chapter introduces the corporation, its goals, and the roles
of financial managers.
Chapter 1 Outline
· Investment and Financing Decisions
· The Corporation
· The Financial Managers
· Goals of the Corporation
· Value Maximization
· Corporate Governance
Note: What are the primary differences among the various legal
forms of business?
Investment and Financing Decisions

2. · The Investment Decision
· Real Assets
· The Financial Assets
· Financial Assets
The Investment Decision– Decision to invest in tangible or
intangible assets.
Also known as the “capital budgeting” or “CAPEX” decision.
The Financing Decision– The form and amount of financing of a
firm’s investments.
Real Assets– Assets used to produce goods and services.
Financial Assets– Financial claims to the income generated by
the firm’s real assets.
Are the following capital budgeting or financing decisions?
· Apple decides to spend $500 million to develop a new iPhone.
· GE borrows $400 million from bond investors.
· Microsoft issues 100 million shares to buy a small technology
company.
· When Apple spends $500 million to develop a new iPhone it is
investing in real assets and is making a capital budgeting
decision.
· When GE borrows $400 million from bond investors it is
investing in financial assets and is making a financing decision.
· When Microsoft issues 100 million shares to buy a smaller
company it is investing in both financial and real assets. It is
making both a capital budgeting and financing decision.
What is a Corporation?
· Corporation-A business organized as a separate legal entity
owned by stockholders.
· Types of Corporations:
· Public Corporations

3. · Private Corporations
Corporation – A business organized as a separate legal entity
owned by stockholders.
Public Company – A corporation whose shares are traded in
public markets such as the New York Stock Exchange or
NASDAQ.
Private Corporation – A corporation whose shares are not traded
publicly.
Benefits of the Corporation
· Limited liability
· Infinite lifespan
· Ease of raising capital
Limited Liability – The owners of a corporation are not
personally liable for its obligation.
Drawbacks of the Corporation
· Corporation face the problem of double taxation
· Improper corporate structures may lead to “Agency Problem”
Double Taxation– Corporations pay taxes on their profits and
the shareholders are taxed again when they receive dividends or
realize capital gains.
Agency Problem– Managers are agents of the shareholders, but
the managers may act in their own interests rather than
maximize value.
Goals of The Corporation
· Shareholders want wealth maximization
· Wealth maximization vs. profit maximization:
· Pitfall: Profits from which period?
· Pitfall: Cutting dividends to increase cash reserves

4. · The ideal goal of any firm is simple: Maximize the current
market value of shareholders’ investment in the firm; not simply
to maximize profits.
· Potential pitfalls in profit maximization:
· Which period’s profits should be maximized?
· A corporation can make short term wasteful investments to
increase profits, but long-term profits and value will be
damaged.
· Cut dividends to increase cash reserves?
· A company may increase future profits by cutting today’s
dividend and reinvesting the cash in the firm. In most cases,
this decreases the value of shareholder investment in the firm.
The Ethics of Maximizing Value
Does value maximization justify unethical behavior?
Recent examples:
· Enron
· WorldCom
· Bernard Madoff
Agency Problem
Different Information
· Stock prices vs. returns
· Dividend Policy
· Financing Decisions
Different Objectives
· Managers vs. shareholders
· Top managers vs. lower managers
· Stockholders vs. banks and lenders
Agency Problem

5. Solution
s
· Compensation plans
· Board of Directors
· Blockholders
· Takeovers Specialist Monitoring
· Legal and Regulatory Requirements
Potential agency problem solutions:
· Compensation plans – Provide managers with incentive
schemes that produce big returns if shareholders gain but little
or nothing if they do not.
· Board of directors – The Sarbanes-Oxley Act has led to more
independent control of corporation Boards. Through a vote, the
board of directors gives shareholders an opportunity to have a
say in the operations of a firm.
· Blockholders – Individual investors who hold 5% or more of
the company. These blockholders may offer some solutions to
agency problems by closely monitoring the firm.
· Takeovers - Poorly performing companies are more likely to
be taken over by another firm. The further a company’s stock
price falls, the easier it is for another company to buy up a

6. majority of its shares.
· Specialist monitoring - Managers are subject to the scrutiny of
specialists. Their actions are monitored by the security analysts
who advise investors to buy, hold, or sell the company’s shares.
· Regulatory requirements - CEOs and financial managers have
a legal duty to act responsibly and in the interests of investors.
Role of the Financial Manager
Financial
Manager
(1)
(2)
(3)
(4a)
(4b)

7. Real assets
Investors
Financial
Assets
Firm’s
Operations
1. Cash raised from investors (how?)
2. Cash invested in firm
3. Cash generated by operations
4A. Cash reinvested in the firm
4B. Cash returned to investors
The Financial Manager
Most large companies have 3 top-level financial managers:

8. · Chief financial officer (CFO)
· Oversees the treasurer and controller. Responsible for setting
the overall financial strategy of the firm.
· Treasurer
· Responsible for financing, cash management, and maintaining
relationships with banks and other financial institutions.
· Controller
· Responsible for budgeting, accounting, and taxes.
Appendix: Careers in Finance
Number of Firms in the U.S.
Number of Firms
CorporationS-CorporationPartnershipSole
Proprietorship129208125844276229081011973
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Business and Faith Integration Paper Assignment Instruc tions

9. Overview
This assignment seeks to integrate the course concepts and
integrate them with Biblical concepts. More specifically, you
will write an essay describing how the Bible is related to the
topics covered in the course.
Instructions
Below are the specifics requirements for this assignment:
· The essay must be at least 1,000 words and include a clear
integration of the Bible in relation to a course topic,
· You must use at least 2 scholarly sources to substantiate your
position
· Sources must be cited in current APA format.
Note: Your assignment will be checked for originality via the
Turnitin plagiarism tool.
MY SELECTED TOPIC IS GOALS AND GOVERNANCE. I
WILL UPLOAD SEPERATELY