Chapter 1: Introduction to Corporate Finance

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Corporate Finance
Ross Westerfield Jaffe
Fifth Edition
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Chapter 1 Introduction to Corporate Finance
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• 1.1 What is Corporate Finance?
• 1.2 Corporate Securities as Contingent Claims on
  Total Firm Value
• 1.3 The Corporate Firm
• 1.4 Goals of the Corporate Firm
• 1.5 Financial Markets
• 1.6 Outline of the Text

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Figure 1.3 Hypothetical Organization Chart
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Board of Directors
Chairman of the Board and Chief Executive
Officer (CEO)
President and Chief Operations Officer (COO)
Vice President and Chief Financial Officer (CFO)
Treasurer
Controller
Cost Accounting Manager
Cash Manager
Tax Manager
Credit Manager
Financial AccountingManager
Data Processing Manager
Capital Expenditures
Financial Planning
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Figure 1.4 Cash Flows between the Firm and the
Financial Markets
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Firm issues securities (A)
Firm Investsin assets(B) Current assetsFixed
assets
Financialmarkets Short-term debt Long-term
debt Equity shares
Retained cash flows (E)
Cash flowfrom firm (C)
Dividends anddebt payments (F)
Taxes
Government(D)
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Figure 1.5 Debt and Equity as Contingent Claims
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Payoff to debtholders
Payoff to equity shareholders
Payoffs to debtholders and equity shareholders
F
Payoff toequityshareholders
F
Value of the firm (X)
F
F
Value of the firm (X)
Payoff todebtholders
F
Value of the firm (X)
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Forms of Business Organization
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• The Sole Proprietorship
• The Partnership
• General Partnership
• Limited Partnership
• The Corporation
• Advantages and Disadvantages
• Liquidity and Marketability of Ownership
• Control
• Liability
• Continuity of Existence
• Tax Considerations

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Separation of Ownership and Control
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Board of Directors
Management
Debtholders
Shareholders
Debt
Assets
Equity