Part

Overview of Corporate Finance 1

Chapter 1

Introduction to Corporate Finance 3

1.1 Corporate Finance and the Financial Manager 4

What Is Corporate Finance? 4 The Financial Manager 4 Financial Management Decisions 4 Capital Budgeting 5 Capital Structure 6 Working Capital Management 6 Conclusion 6

1.2 Forms of Business Organization 7

Sole Proprietorship 7 Partnership 7 Corporation 8

A Corporation by Another Name . . . 9

1.3 The Goal of Financial Management 10

Possible Goals 10

The Goal of Financial Management 11 A More General Goal 12

1.4 The Agency Problem and Control of the Corporation 12

Agency Relationships 14 Management Goals 14

Do Managers Act in the Stockholders' Interests? 14 Managerial Compensation 15 Control of the Firm 15 Conclusion 16 Stakeholders 16

1.5 Financial Markets and the Corporation 17 Cash Flows to and from the Firm 17 Primary versus Secondary Markets 18

Primary Markets 18 Secondary Markets 18

1.6 Summary and Conclusions 20 Chapter 2

Financial Statements, Taxes, and Cash Flow 23

2.1 The Balance Sheet 23

Assets: The Left-Hand Side 23

Liabilities and Owners' Equity: The Right-Hand Side 24 Net Working Capital 25 Liquidity 25 Debt versus Equity 26 Market Value versus Book Value 27

2.2 The Income Statement 28 GAAP and the Income Statement 29 Noncash Items 30

Time and Costs 30

2.3 Taxes 32 Corporate Tax Rates 32

Average versus Marginal Tax Rates 32

2.4 Cash Flow 34

Cash Flow from Assets 35 Operating Cash Flow 35 Capital Spending 36 Change in Net Working Capital 36 Conclusion 37

A Note on "Free" Cash Flow 37 Cash Flow to Creditors and Stockholders 37 Cash Flow to Creditors 37 Cash Flow to Stockholders 37 An Example: Cash Flows for Dole Cola 39 Operating Cash Flow 39 Net Capital Spending 40 Change in NWC and Cash Flow from Assets 40 Cash Flow to Stockholders and Creditors 41

2.5 Summary and Conclusions 42

Prosperity Pursuit

Prosperity Pursuit

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