2. Copyright ยฉ 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
1
Chapter 1
Introduction to
Financial
Management
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Key Concepts and Skills
โข Know the basic types of financial
management decisions and the role of
the financial manager
โข Know the financial implications of the
different forms of business organization
โข Know the goal of financial management
โข Understand the conflicts of interest that
can arise between owners and
managers
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Chapter Outline
โข Finance: A Quick Look
โข Business Finance and The Financial
Manager
โข Forms of Business Organization
โข The Goal of Financial Management
โข The Agency Problem and Control of the
Corporation
โข Financial Markets and the Corporation
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Basic Areas Of Finance
โข Corporate finance
โข Investments
โข Financial institutions
โข International finance
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Investments
โข Work with financial assets such as
stocks and bonds
โข Value of financial assets, risk versus
return, and asset allocation
โข Job opportunities
โ Stockbroker or financial advisor
โ Portfolio manager
โ Security analyst
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Financial Institutions
โข Companies that specialize in financial
matters
โ Banks โ commercial and investment, credit
unions, savings and loans
โ Insurance companies
โ Brokerage firms
โข Job opportunities
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International Finance
โข This is an area of specialization within each of
the areas discussed so far
โข It may allow you to work in other countries or
at least travel on a regular basis
โข Need to be familiar with exchange rates and
political risk
โข Need to understand the customs of other
countries; speaking a foreign language
fluently is also helpful
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Why Study Finance?
โข Marketing
โ Budgets, marketing research, marketing financial
products
โข Accounting
โ Dual accounting and finance function, preparation
of financial statements
โข Management
โ Strategic thinking, job performance, profitability
โข Personal finance
โ Budgeting, retirement planning, college planning,
day-to-day cash flow issues
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Business Finance
โข Some important questions that are
answered using finance
โ What long-term investments should the firm
take on?
โ Where will we get the long-term financing to
pay for the investments?
โ How will we manage the everyday financial
activities of the firm?
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Financial Manager
โข Financial managers try to answer some, or
all, of these questions
โข The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
โ Treasurer โ oversees cash management, credit
management, capital expenditures, and financial
planning
โ Controller โ oversees taxes, cost accounting,
financial accounting, and data processing
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Financial Management
Decisions
โข Capital budgeting
โ What long-term investments or projects
should the business take on?
โข Capital structure
โ How should we pay for our assets?
โ Should we use debt or equity?
โข Working capital management
โ How do we manage the day-to-day
finances of the firm?
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Forms of Business Organization
โข Three major forms in the United States
โ Sole proprietorship
โ Partnership
โข General
โข Limited
โ Corporation
โข S-Corp
โข Limited liability company
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Sole Proprietorship
โข Advantages
โ Easiest to start
โ Least regulated
โ Single owner keeps
all of the profits
โ Taxed once as
personal income
โข Disadvantages
โ Limited to life of owner
โ Equity capital limited to
ownerโs personal
wealth
โ Unlimited liability
โ Difficult to sell
ownership interest
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Partnership
โข Advantages
โ Two or more owners
โ More capital available
โ Relatively easy to
start
โ Income taxed once as
personal income
โข Disadvantages
โ Unlimited liability
โข General partnership
โข Limited partnership
โ Partnership dissolves
when one partner dies
or wishes to sell
โ Difficult to transfer
ownership
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Corporation
โข Advantages
โ Limited liability
โ Unlimited life
โ Separation of
ownership and
management
โ Transfer of ownership
is easy
โ Easier to raise capital
โข Disadvantages
โ Separation of
ownership and
management (agency
problem)
โ Double taxation
(income taxed at the
corporate rate and
then dividends taxed
at personal rate, while
dividends paid are not
tax deductible)
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Goal Of Financial Management
โข What should be the goal of a corporation?
โ Maximize profit?
โ Minimize costs?
โ Maximize market share?
โ Maximize the current value of the companyโs
stock?
โข Does this mean we should do anything
and everything to maximize owner wealth?
โข Sarbanes-Oxley Act
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The Agency Problem
โข Agency relationship
โ Principal hires an agent to represent its
interests
โ Stockholders (principals) hire managers
(agents) to run the company
โข Agency problem
โ Conflict of interest between principal and
agent
โข Management goals and agency costs
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Managing Managers
โข Managerial compensation
โ Incentives can be used to align management and
stockholder interests
โ The incentives need to be structured carefully to
make sure that they achieve their goal
โข Corporate control
โ The threat of a takeover may result in better
management
โข Other stakeholders
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Example: Work the Web
โข The Internet provides a wealth of
information about individual companies
โข One excellent site is finance.yahoo.com
โข Click on the Web surfer to go to the site,
choose a company and see what
information you can find!
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Financial Markets
โข Cash flows to the firm
โข Primary vs. secondary markets
โ Dealer vs. auction markets
โ Listed vs. over-the-counter securities
โข NYSE
โข NASDAQ
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Quick Quiz
โข What are the four basic areas of finance?
โข What are the three types of financial
management decisions, and what questions
are they designed to answer?
โข What are the three major forms of business
organization?
โข What is the goal of financial management?
โข What are agency problems, and why do they
exist within a corporation?