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Chapter 1 Introduction  to Financial  Management
Basic Areas Of Finance <ul><li>Business finance </li></ul><ul><li>Investments </li></ul><ul><li>Financial institutions </l...
Business Finance <ul><li>Various duties within companies </li></ul><ul><li>Evaluating past investments, analyzing future p...
Investments <ul><li>Work with financial assets such as stocks and bonds </li></ul><ul><li>Value financial assets and decid...
Financial Institutions <ul><li>Companies that specialize in financial matters </li></ul><ul><ul><li>Banks – commercial and...
Why Study Finance? <ul><li>Marketing </li></ul><ul><ul><li>Budgets, marketing research, marketing financial products </li>...
Forms of Business Organization <ul><li>Three major forms in the United States </li></ul><ul><ul><li>Sole proprietorship </...
Sole Proprietorship <ul><li>Advantages </li></ul><ul><ul><li>Easiest to start </li></ul></ul><ul><ul><li>Least regulated <...
Partnership <ul><li>Advantages </li></ul><ul><ul><li>Two or more owners </li></ul></ul><ul><ul><li>More capital available ...
Corporation <ul><li>Advantages </li></ul><ul><ul><li>Limited liability </li></ul></ul><ul><ul><li>Unlimited life </li></ul...
Goal Of Financial Management <ul><li>What should be the goal of a sole proprietorship? </li></ul><ul><li>What should be th...
Goal Of Financial Management <ul><li>Goal of corporation =  </li></ul><ul><li>maximize shareholder wealth  (maximize stock...
The Agency Problem <ul><li>Agency relationship </li></ul><ul><ul><li>Principal hires an agent to represent their interest ...
Managing Managers <ul><li>Managerial compensation </li></ul><ul><ul><li>Incentives can be used to align management and sto...
Adam Smith’s “Invisible Hand” <ul><li>Shareholder wealth maximization… </li></ul><ul><li>How a business succeeds: </li></u...
Quick Quiz <ul><li>What are the three basic areas of finance? </li></ul><ul><li>What are the three major forms of business...
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Chapter 1 Introduction to Financial

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Chapter 1 Introduction to Financial

  1. 1. Chapter 1 Introduction to Financial Management
  2. 2. Basic Areas Of Finance <ul><li>Business finance </li></ul><ul><li>Investments </li></ul><ul><li>Financial institutions </li></ul><ul><li>(International Finance?) </li></ul>
  3. 3. Business Finance <ul><li>Various duties within companies </li></ul><ul><li>Evaluating past investments, analyzing future projects </li></ul><ul><li>Job opportunities </li></ul><ul><ul><li>Entry level – cost accounting </li></ul></ul><ul><ul><li>Advanced – financial analyst </li></ul></ul>
  4. 4. Investments <ul><li>Work with financial assets such as stocks and bonds </li></ul><ul><li>Value financial assets and decide asset allocation </li></ul><ul><li>Job opportunities </li></ul><ul><ul><li>Stockbroker or financial advisor </li></ul></ul><ul><ul><li>Portfolio manager </li></ul></ul><ul><ul><li>Security analyst </li></ul></ul>
  5. 5. Financial Institutions <ul><li>Companies that specialize in financial matters </li></ul><ul><ul><li>Banks – commercial and investment, credit unions, savings and loans </li></ul></ul><ul><ul><li>Insurance companies </li></ul></ul><ul><ul><li>Brokerage firms </li></ul></ul><ul><li>Job opportunities </li></ul><ul><ul><li>Loan officer </li></ul></ul><ul><ul><li>Insurance agent </li></ul></ul><ul><ul><li>Brokerage agent </li></ul></ul>
  6. 6. Why Study Finance? <ul><li>Marketing </li></ul><ul><ul><li>Budgets, marketing research, marketing financial products </li></ul></ul><ul><li>Accounting </li></ul><ul><ul><li>Dual accounting and finance function, preparation of financial statements </li></ul></ul><ul><li>Management </li></ul><ul><ul><li>Strategic thinking, job performance, profitability </li></ul></ul><ul><li>Personal finance </li></ul><ul><ul><li>Budgeting, retirement planning, college planning, day-to-day cash flow issues </li></ul></ul>
  7. 7. Forms of Business Organization <ul><li>Three major forms in the United States </li></ul><ul><ul><li>Sole proprietorship </li></ul></ul><ul><ul><li>Partnership </li></ul></ul><ul><ul><ul><li>General </li></ul></ul></ul><ul><ul><ul><li>Limited </li></ul></ul></ul><ul><ul><li>Corporation </li></ul></ul><ul><ul><ul><li>Limited liability company </li></ul></ul></ul>
  8. 8. Sole Proprietorship <ul><li>Advantages </li></ul><ul><ul><li>Easiest to start </li></ul></ul><ul><ul><li>Least regulated </li></ul></ul><ul><ul><li>Single owner keeps all the profits </li></ul></ul><ul><ul><li>Taxed once as personal income </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Limited to life of owner </li></ul></ul><ul><ul><li>Equity capital limited to owner’s personal wealth </li></ul></ul><ul><ul><li>Unlimited liability </li></ul></ul><ul><ul><li>Difficult to sell ownership interest </li></ul></ul>
  9. 9. Partnership <ul><li>Advantages </li></ul><ul><ul><li>Two or more owners </li></ul></ul><ul><ul><li>More capital available </li></ul></ul><ul><ul><li>Relatively easy to start </li></ul></ul><ul><ul><li>Income taxed once as personal income </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Partnership dissolves when one partner dies or wishes to sell </li></ul></ul><ul><ul><li>Difficult to transfer ownership </li></ul></ul><ul><ul><li>Unlimited liability? </li></ul></ul><ul><ul><ul><li>General partnership </li></ul></ul></ul><ul><ul><ul><li>Limited partnership </li></ul></ul></ul>
  10. 10. Corporation <ul><li>Advantages </li></ul><ul><ul><li>Limited liability </li></ul></ul><ul><ul><li>Unlimited life </li></ul></ul><ul><ul><li>Separation of ownership and management </li></ul></ul><ul><ul><li>Transfer of ownership is easy </li></ul></ul><ul><ul><li>Easier to raise capital </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Separation of ownership and management </li></ul></ul><ul><ul><li>Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate) </li></ul></ul>
  11. 11. Goal Of Financial Management <ul><li>What should be the goal of a sole proprietorship? </li></ul><ul><li>What should be the goal of a corporation? </li></ul><ul><ul><li>Maximize firm size? </li></ul></ul><ul><ul><li>Maximize profits? </li></ul></ul><ul><ul><li>Minimize costs? </li></ul></ul>
  12. 12. Goal Of Financial Management <ul><li>Goal of corporation = </li></ul><ul><li>maximize shareholder wealth (maximize stock price) </li></ul>
  13. 13. The Agency Problem <ul><li>Agency relationship </li></ul><ul><ul><li>Principal hires an agent to represent their interest </li></ul></ul><ul><ul><li>Stockholders (principals) hire managers (agents) to run the company </li></ul></ul><ul><li>Agency problem </li></ul><ul><ul><li>Shareholders’ goals = stock price maximization </li></ul></ul><ul><ul><li>Managers’ goals = ??? </li></ul></ul><ul><ul><li>Conflict of interest between principal and agent </li></ul></ul><ul><li>Management goals and agency costs </li></ul>
  14. 14. Managing Managers <ul><li>Managerial compensation </li></ul><ul><ul><li>Incentives can be used to align management and stockholder interests </li></ul></ul><ul><li>Corporate control </li></ul><ul><ul><li>The threat of a takeover may result in better management </li></ul></ul><ul><li>Other stakeholders </li></ul>
  15. 15. Adam Smith’s “Invisible Hand” <ul><li>Shareholder wealth maximization… </li></ul><ul><li>How a business succeeds: </li></ul><ul><ul><li>Produce a product consumers want </li></ul></ul><ul><ul><li>Optimize quality/price for consumers </li></ul></ul><ul><ul><li>Sell at a convenient location for consumers </li></ul></ul>
  16. 16. Quick Quiz <ul><li>What are the three basic areas of finance? </li></ul><ul><li>What are the three major forms of business organization? </li></ul><ul><li>What is the goal of financial management? </li></ul><ul><li>What are agency problems and why do they exist within a corporation? </li></ul>

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