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Fundamentals of Corporate Finance

This material is an introduction to corporate finance. We will discuss the various responsibilities of the corporation`s financial managers and show you how to tackle many of the problems that these managers are expected to solve. We begin with a discussion of the corporation, the financial decisions it needs to make, and why they are important.

To survive and prosper, a company must satisfy its customers. It must also produce and sell products and services at a profit. In order to produce, it needs many assets plant, equipment, offices, computers, technology, and so on. The company has to decide (1) which assets to buy and (2) how to pay for them. The financial manager plays a key role in both these decisions. The investment decision, that is, the decision to invest in assets like plant, equipment, and know-how, is in large part a responsibility of the financial manager. So is the financing decision, the choice of how to pay for such investments.

We start by explaining how businesses are organized. We then provide a brief introduction to the role of the financial manager and show you why corporate managers need a sophisticated understanding of financial markets. Next we turn to the goals of the firm and ask what makes for a good financial decision. Is the firm`s aim to maximize profits? To avoid bankruptcy? To be a good citizen? We consider some conflicts of interest that arise in large organizations and review some mechanisms that align the interests of the firm`s managers with the interests of its owners. Finally, we provide an overview of what is to come.

After studying this material you should be able to_ Explain the advantages and disadvantages of the most common forms of business organization and determine which forms are most suitable to different types of businesses.

_ Cite the major business functions and decisions that the firm`s financial managers are responsible for and understand some of the possible career choices in finance.

_ Explain the role of financial markets and institutions.

_ Explain why it makes sense for corporations to maximize their market values.

_ Show why conflicts of interest may arise in large organizations and discuss how corporations can provide incentives for everyone to work toward a common end.