Chapter 1 The Scope of Corporate Finance
Chapter Overview
The Opening Focus looks at an issue close to most students’ hearts – digital music. It details Ap-
ple’s successful strategy in selling songs for about a dollar each, downloaded into its iPod MP3
player. Students may not realize that Apple sells more iPods than computers. Apple has found a
way to compete in two highly competitive businesses – music and computers. Chapter 1 looks at
how financial managers, like those at Apple, interacted with operations, marketing, communica-
tions and legal to create shareholder wealth. The importance of the finance function and the finan-
cial manager within business organizations has been rising steadily over the past two decades.
Financial professionals can do more than just raise the operating efficiency of a company—they
can create value in their own right. The primary focus of this textbook will be on the practicing
financial manager, working as an integral part of the management team of a modern corporation.
As an introduction to what a financial manager’s job entails, this chapter includes a description of
the principal tasks and responsibilities that a finance professional employed by a large corporation
might encounter.
Discussion Questions:
1. What do you imagine were the interactions between the finance function and operations func-
tion at Apple when the iPod was being developed? On what business criteria does Apple’s
strategy depend?
2. What can a firm do to make a low profit margin strategy more successful? What are other ex-
amples of tie-ins, like Apple’s iTunes and iPod?
This chapter looks at:
1-1. The Role of Corporate Finance in Business Today
1-2. Essentials of Corporate Finance
1-3. Legal Forms of Business Organization
1-4. The Corporate Financial Manager’s Goals
Technology
1. Smart Concepts Video. The SmartConcepts video is an excellent introduction to a corporate
finance course. It talks about Given Industries, an Israeli company that uses high tech imaging
in medicine. The video looks at financing, including venture capital financing and an initial
public offering, the capital budgeting function, the financial management function, globaliza-
tion and the stock market.
2. Smart Practices Video. This interviews Tom Cole, Deutsche Bank, Leveraged Finance
Group, telling how important it is to understand how business works in order to be good at fi-
nance.
3. Smart Practices Video. This quotes Joshua Haines, senior credit analyst at the Private Bank,
concerning how he continues to use basic finance concepts he learned in earlier finance classes.
1
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly acces-
sible website, in whole or in part.
,2 Instructor’s Manual
4. Smart Practices Video. This quotes Bill Eckmann, investment banker, concerning his career
in investment banking.
5. Smart Concepts Video. This quotes David Nickel, controller for Intel Corp.’s Communica-
tions Group, about how finance can help business increase shareholder value.
6. Smart Ethics Video. Andy Bryant, executive vice president of finance and enterprise systems
and chief financial officer, Intel Corp., discusses that ethical behavior on the part of a company
can add value.
7. Smart Practices Video. This quotes Vince LoForti, chief financial officer of Overland Stor-
age Inc. about the impact of Sarbanes-Oxley on a company’s business.
Lecture Guide
1-1: The Role of Corporate Finance in Modern Business
1-1a: How Finance Interacts with Other Functional Business Areas
1-1b: Career Opportunities in Finance
Give students some examples of jobs they can get as finance graduates. The college career services
office may be helpful in giving examples of specific employers who recruit on campus. It may also
have information about average pay scales in each area in finance.
1-2: Corporate Finance Essentials
The instructor can use this slide to introduce the topics that will be covered throughout the semes-
ter, including when and how much in depth each topic will be covered in this course, and what
might be topics for other finance courses.
1-2a: External Financing: Raising Capital, Key Facts
Explain that internal financing – the profits that a firm generates that are not paid to sharehold-
ers as dividends are the most important source of firm financing. A company seeks capital market
debt and equity finance when it does not generate enough funds for its investment opportunities.
Tell students about the history of finance. For example, raising funds from a large number of
investors spread with the legal concept of a corporation. During the 17th century, corporations were
first given limited liability. This induced wealthy individuals to invest – they knew the worst that
could happen was the loss of their investment; they would not lose all of their wealth in a bad ven-
ture. The idea of incorporation was so successful that England freely allowed companies to incor-
porate by the mid 19th century. Other countries followed England’s lead. The verb “to finance,” or
raising funds for investment, was entered into the English dictionary in 1866.
Student Interaction:
Ask students how many of them give money directly to a company. Few will (unless
they own their own business.) This is a good springboard to how corporations receive
money from individuals, for example, through banks that lend their savings deposits to
firms. Few, if any of the students will have participated in a company’s direct means
of obtaining funds (initial public offerings and secondary offerings) and are more like-
ly to have participated in stock investing through the secondary market.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly acces-
sible website, in whole or in part.
, Chapter 1 The Scope of Corporate Finance 3
This section provides an opportunity to bring in current events, while explaining the external
financing choices a firm has. The Google IPO made news in the summer of 2004. It was an inno-
vative IPO. For most IPOs, only the favored clients of the investment banking firm can purchase
shares at the IPO price. Google specifically structured its IPO so that small investors could partici-
pate, buying as few as 5 shares of Google. At the time of the IPO, Google had a great deal of in-
formation posted online, at http://www.ipo.google.com. If still available, the instructor can run
Google’s interactive prospectus
The Capital Budgeting Function
Capital budgeting is the function perhaps most highly associated with corporate finance –
what projects should a firm invest in? Note how the nature of investment has changed over time.
Investment used to mean building a factory and stocking it with equipment. Today’s business
model generally requires a high investment in information technology. It is much harder to meas-
ure the value of an investment in IT. A factory produces a particular product that is then sold to
consumers. Ask students what technology produces. It may be more of preventing a loss; for ex-
ample, investing in IT may keep consumers coming to a company’s online and physical retail
stores. The firm has invested in IT to keep customers from shopping at competitors with better
Web sites.
The Financial Management Function
Note that this function covers the theory that financial managers put into practice in their jobs.
The Corporate Governance Function
Talk to students about the nexus of stakeholders concerned with a corporation. Corporations must
be concerned with
Shareholders
Debtholders/Creditors
Managers
Employees
Local community
Suppliers
Customers
The idea of a “nexus of stakeholders” is becoming increasingly recognized; for example, Penn-
sylvania has a law stating that boards of directors must take the concerns of other interested parties
into account, not just those of shareholders.
This chapter is a good opportunity to bring in current issues in finance. The after-effects of the
current accounting scandals (Enron, Worldcom, Adelphia, etc.) will be in the news for a long time.
Define executive stock options, and ask students for their opinion about their usage. Ask for sug-
gestions about what small shareholders can do if they are unhappy about the way their firm is man-
aged (band together, sell shares). Ask if company insiders should be on a company’s board of
directors.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly acces-
sible website, in whole or in part.
Chapter Overview
The Opening Focus looks at an issue close to most students’ hearts – digital music. It details Ap-
ple’s successful strategy in selling songs for about a dollar each, downloaded into its iPod MP3
player. Students may not realize that Apple sells more iPods than computers. Apple has found a
way to compete in two highly competitive businesses – music and computers. Chapter 1 looks at
how financial managers, like those at Apple, interacted with operations, marketing, communica-
tions and legal to create shareholder wealth. The importance of the finance function and the finan-
cial manager within business organizations has been rising steadily over the past two decades.
Financial professionals can do more than just raise the operating efficiency of a company—they
can create value in their own right. The primary focus of this textbook will be on the practicing
financial manager, working as an integral part of the management team of a modern corporation.
As an introduction to what a financial manager’s job entails, this chapter includes a description of
the principal tasks and responsibilities that a finance professional employed by a large corporation
might encounter.
Discussion Questions:
1. What do you imagine were the interactions between the finance function and operations func-
tion at Apple when the iPod was being developed? On what business criteria does Apple’s
strategy depend?
2. What can a firm do to make a low profit margin strategy more successful? What are other ex-
amples of tie-ins, like Apple’s iTunes and iPod?
This chapter looks at:
1-1. The Role of Corporate Finance in Business Today
1-2. Essentials of Corporate Finance
1-3. Legal Forms of Business Organization
1-4. The Corporate Financial Manager’s Goals
Technology
1. Smart Concepts Video. The SmartConcepts video is an excellent introduction to a corporate
finance course. It talks about Given Industries, an Israeli company that uses high tech imaging
in medicine. The video looks at financing, including venture capital financing and an initial
public offering, the capital budgeting function, the financial management function, globaliza-
tion and the stock market.
2. Smart Practices Video. This interviews Tom Cole, Deutsche Bank, Leveraged Finance
Group, telling how important it is to understand how business works in order to be good at fi-
nance.
3. Smart Practices Video. This quotes Joshua Haines, senior credit analyst at the Private Bank,
concerning how he continues to use basic finance concepts he learned in earlier finance classes.
1
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly acces-
sible website, in whole or in part.
,2 Instructor’s Manual
4. Smart Practices Video. This quotes Bill Eckmann, investment banker, concerning his career
in investment banking.
5. Smart Concepts Video. This quotes David Nickel, controller for Intel Corp.’s Communica-
tions Group, about how finance can help business increase shareholder value.
6. Smart Ethics Video. Andy Bryant, executive vice president of finance and enterprise systems
and chief financial officer, Intel Corp., discusses that ethical behavior on the part of a company
can add value.
7. Smart Practices Video. This quotes Vince LoForti, chief financial officer of Overland Stor-
age Inc. about the impact of Sarbanes-Oxley on a company’s business.
Lecture Guide
1-1: The Role of Corporate Finance in Modern Business
1-1a: How Finance Interacts with Other Functional Business Areas
1-1b: Career Opportunities in Finance
Give students some examples of jobs they can get as finance graduates. The college career services
office may be helpful in giving examples of specific employers who recruit on campus. It may also
have information about average pay scales in each area in finance.
1-2: Corporate Finance Essentials
The instructor can use this slide to introduce the topics that will be covered throughout the semes-
ter, including when and how much in depth each topic will be covered in this course, and what
might be topics for other finance courses.
1-2a: External Financing: Raising Capital, Key Facts
Explain that internal financing – the profits that a firm generates that are not paid to sharehold-
ers as dividends are the most important source of firm financing. A company seeks capital market
debt and equity finance when it does not generate enough funds for its investment opportunities.
Tell students about the history of finance. For example, raising funds from a large number of
investors spread with the legal concept of a corporation. During the 17th century, corporations were
first given limited liability. This induced wealthy individuals to invest – they knew the worst that
could happen was the loss of their investment; they would not lose all of their wealth in a bad ven-
ture. The idea of incorporation was so successful that England freely allowed companies to incor-
porate by the mid 19th century. Other countries followed England’s lead. The verb “to finance,” or
raising funds for investment, was entered into the English dictionary in 1866.
Student Interaction:
Ask students how many of them give money directly to a company. Few will (unless
they own their own business.) This is a good springboard to how corporations receive
money from individuals, for example, through banks that lend their savings deposits to
firms. Few, if any of the students will have participated in a company’s direct means
of obtaining funds (initial public offerings and secondary offerings) and are more like-
ly to have participated in stock investing through the secondary market.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly acces-
sible website, in whole or in part.
, Chapter 1 The Scope of Corporate Finance 3
This section provides an opportunity to bring in current events, while explaining the external
financing choices a firm has. The Google IPO made news in the summer of 2004. It was an inno-
vative IPO. For most IPOs, only the favored clients of the investment banking firm can purchase
shares at the IPO price. Google specifically structured its IPO so that small investors could partici-
pate, buying as few as 5 shares of Google. At the time of the IPO, Google had a great deal of in-
formation posted online, at http://www.ipo.google.com. If still available, the instructor can run
Google’s interactive prospectus
The Capital Budgeting Function
Capital budgeting is the function perhaps most highly associated with corporate finance –
what projects should a firm invest in? Note how the nature of investment has changed over time.
Investment used to mean building a factory and stocking it with equipment. Today’s business
model generally requires a high investment in information technology. It is much harder to meas-
ure the value of an investment in IT. A factory produces a particular product that is then sold to
consumers. Ask students what technology produces. It may be more of preventing a loss; for ex-
ample, investing in IT may keep consumers coming to a company’s online and physical retail
stores. The firm has invested in IT to keep customers from shopping at competitors with better
Web sites.
The Financial Management Function
Note that this function covers the theory that financial managers put into practice in their jobs.
The Corporate Governance Function
Talk to students about the nexus of stakeholders concerned with a corporation. Corporations must
be concerned with
Shareholders
Debtholders/Creditors
Managers
Employees
Local community
Suppliers
Customers
The idea of a “nexus of stakeholders” is becoming increasingly recognized; for example, Penn-
sylvania has a law stating that boards of directors must take the concerns of other interested parties
into account, not just those of shareholders.
This chapter is a good opportunity to bring in current issues in finance. The after-effects of the
current accounting scandals (Enron, Worldcom, Adelphia, etc.) will be in the news for a long time.
Define executive stock options, and ask students for their opinion about their usage. Ask for sug-
gestions about what small shareholders can do if they are unhappy about the way their firm is man-
aged (band together, sell shares). Ask if company insiders should be on a company’s board of
directors.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated or posted to a publicly acces-
sible website, in whole or in part.
