[...]... management Portfolio manager Department head Insurance Chief investment officer Chief financial officer 17 Annual Salary $225,000 15 0,000 16 0,000 11 0,000 16 5,000 250,000 200,000 19 0,000 + bonus 400,000 + 750,000 + 13 6,000 200,000 19 1,000 + bonus 16 8,000 + bonus Sources: http://careers.wsj.com; http://www.cob.ohio-state.edu/~fin/osujobs.htm (April 19 99) Stockbroking firms and bond dealers help investment management... has financed its inventory with a bank loan Victor has little of his own money invested in the business Video shops usually command little customer loyalty 11 For example, the motto of the London Stock Exchange is “My word is my bond.” discussion is based on Clifford W Smith Jr., “Economics and Ethics: The Case of Salomon Brothers,” Journal of Applied Corporate Finance 5 (Summer 19 92), pp 23–28 12 This... In recent years, the chief executives of IBM, Eastman Kodak, General Motors, and Apple Computer all were forced This discussion is based on Stephen F O’Byrne, “What Pay for Performance Looks Like: The Case of Michael Eisner,” Journal of Applied Corporate Finance 5 (Summer 19 92), pp 13 5 13 6 13 The Firm and the Financial Manager 23 TABLE 1. 4 Highest earning CEOs in 19 98 Individual Company Michael Eisner... offers to pay the most Now compare your responses with the responses of a random sample of individuals: Percent Rating the Action As: Action Acceptable Unfair 1a 1b 2 3a 3b 4 5 6 17 73 63 23 68 21 18 26 83 27 37 77 32 79 82 74 Source: Adapted from D Kahneman, J L Knetsch, and R Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,” American Economic Review 76 (September 19 86),... was hired as chief executive officer (CEO) by the Walt Disney Company, his compensation package had three main components: a base annual salary of $750,000; an annual bonus of 2 percent of Disney’s net income above a threshold of “normal” profitability; and a 10 -year option that allowed him to purchase 2 million shares of stock for $14 per share, which was about the price of Disney stock at the time... disadvantage of corporate organization is double taxation The financial managers of a corporation are responsible, by way of top management and the board of directors, to the corporation’s shareholders Financial managers are supposed to make financial decisions that serve shareholders’ interests Table 1. 1 presents the distinctive features of the major forms of business organization HYBRID FORMS OF BUSINESS... controller? Briefly explain CAREERS IN FINANCE SEE BOX In the United States well over 1 million people work in financial services, and many others work in the finance departments of corporations We can’t tell you what each person does all day, but we can give you some idea of the variety of careers in finance The nearby box summarizes the experience of a small sample of recent (fictitious) graduates We... say that their job is to “maximize profits.” That sounds reasonable After all, don’t shareholders want their company to be profitable? But taken literally, profit maximization is not a well-defined corporate objective Here are three reasons: 1 “Maximizing profits” leaves open the question of “which year’s profits?” The company may be able to increase current profits by cutting back on maintenance or... Morgan Stanley Dean Witter Colgate-Palmolive Total Earnings (in millions) Option Component (in millions) $575.6 16 6.9 15 9.2 83.6 57.3 56.3 53.4 52.7 $569.8 15 6.6 15 8 .1 46.5 37.0 30.4 40 .1 42.2 Source: Republished with permission of Dow Jones, from the Wall Street Journal, April 8, 19 99, p R1: permission conveyed through Copyright Clearance Center, Inc SEE BOX out The nearby box points out that boards... the case of the Salomon Brothers bidding scandal in 19 91. 12 A Salomon trader tried to evade rules limiting its participation in auctions of U.S Treasury bonds by submitting bids in the names of the company’s customers without the customers’ knowledge When this was discovered, Salomon settled the case by paying almost $200 million in fines and establishing a $10 0 million fund for payments of claims . Sheet 11 2 Book Values and Market Values 11 5 The Income Statement 11 7 Profits versus Cash Flow 11 8 The Statement of Cash Flows 11 9 Accounting for Differences 12 1 Taxes 12 3 Corporate Tax 12 3 Personal. Balances 18 9 Summary 19 0 Related Web Links 19 1 Key Terms 19 1 Quiz 19 1 Practice Problems 19 2 Challenge Problem 19 4 Solutions to Self-Test Questions 19 5 Minicase 19 7 Cash and Inventory Management 2 01 Cash. 12 3 Personal Tax 12 5 Summary 12 6 Related Web Links 12 7 Key Terms 12 7 Quiz 12 7 Practice Problems 12 8 Challenge Problem 13 1 Solutions to Self-Test Questions 13 1 APPENDIX A 10 9 SECTION 2 16 3 Working