Corporate Finance Theory and Practice, Third Edition

Chapter 1

WHAT IS CORPORATE FINANCE?

To whet your appetite…

The primary role of the financial manager is to ensure that his company has a sufficient supply of capital.

The financial manager is at the crossroads of the real economy, with its industries and services, and the world of finance, with its various financial markets and structures.

There are two ways of looking at the financial manager's role:

• a buyer of capital who seeks to minimise its cost, i.e. the traditional view;
• a seller of financial securities who tries to maximise their value. This is the view we will develop throughout this book. It corresponds, to a greater or lesser extent, to the situation that exists in a capital market economy, as opposed to a credit-based economy.

At the risk of oversimplifying, we will use the following terminology in this book:

• the financial manager or chief financial officer (CFO) is responsible for financing the firm and acts as an intermediary between the financial system's institutions and markets, on the one hand, and the company, on the other;
• the business manager invests in plants and equipment, undertakes research, hires staff and sells the firm's products, whether the firm is a manufacturer, a retailer or a service provider;
• the financial investor invests in financial securities. More generally, the financial investor provides the firm with financial resources, and may be either an equity investor or a lender.

Section 1.1

THE FINANCIAL MANAGER IS FIRST AND FOREMOST A SALESMAN ...