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Chapter 1
Introduction to
Financial
Management
McGraw-Hill/Irwin
Key Concepts and Skills
• Know the basic types of financial
management decisions and the role of the
financial manager
• Know the financial implications of the
different forms of business organization
• Know the goal of financial management
• Understand the conflicts of interest that can
arise between owners and managers
• Understand the various types of financial
markets
1-1
Chapter Outline
• Corporate Finance and the Financial
Manager
• Forms of Business Organization
• The Goal of Financial Management
• The Agency Problem and Control of
the Corporation
• Financial Markets and the
Corporation
1-2
Corporate Finance
• Some important questions that are
answered using finance:
– What long-term investments should the
firm take on?
– Where will we get the long-term
financing to pay for the investment?
– How will we manage the everyday
financial activities of the firm?
1-3
Financial Manager
• Financial managers try to answer some or all
of these questions
• The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting and data processing
Watch the video and explain:
https://www.youtube.com/watch?v=AQdtc25jJfE&
ab_channel=TheFinancialController 1-4
Financial Management
Decisions
• Capital budgeting/Investment decision
– What long-term investments or projects
should the business take on?
• Capital structure
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management
– How do we manage the day-to-day
finances of the firm?
1-5
Forms of Business
Organization
• Three major forms in the United
States
– Sole Proprietorship
– Partnership
• General
• Limited
– Corporation
• C-Corp
• S-Corp
• Limited Liability Company
1-6
Sole Proprietorship
• Advantages
– Easiest to start
– Least regulated
– Single owner keeps
all the profits
– Taxed once as
personal income
• Disadvantages
– Limited to life of
owner
– Equity capital
limited to owner’s
personal wealth
– Unlimited liability
– Difficult to sell
ownership interest
1-7
Partnership
• Advantages
– Two or more
owners
– More capital
available
– Relatively easy to
start
– Income taxed once
as personal income
• Disadvantages
– Unlimited liability
• General partnership
• Limited partnership
– Partnership
dissolves when one
partner dies or
wishes to sell
– Difficult to transfer
ownership
1-8
Corporation
• Advantages
– Limited liability
– Unlimited life
– Separation of
ownership and
management
– Transfer of
ownership is easy
– Easier to raise
capital
• Disadvantages
– Separation of
ownership and
management
– Double taxation
(income taxed at
the corporate rate
and then dividends
taxed at the
personal rate)
1-9
Goal of Financial
Management
• What should be the goal of a corporation?
– Maximize profit? Profit= Revenue- Expense
– Minimize costs?
– Maximize market share?
– Maximize the current value of the company’s
stock?- Shareholder wealth maximization
• Does this mean we should do anything and
everything to maximize owner wealth?
1-
10
The Agency Problem
• Agency relationship
– Principal hires an agent to represent
his/her interests
– Stockholders (principals) hire managers
(agents) to run the company
• Agency problem
– Conflict of interest between principal and
agent
• Management goals and agency costs
1-
11
• https://www.youtube.com/watch?v=
UmXjfiKOEjQ&ab_channel=Michael
Ogunseyin
• https://www.youtube.com/watch?v=
-1TbIq-
1mxc&ab_channel=MichaelOgunse
yin
Managing Managers
• Managerial compensation
– Incentives can be used to align management
and stockholder interests
– The incentives need to be structured carefully to
make sure that they achieve their goal
• Corporate control
– The threat of a takeover may result in better
management
• Other stakeholders
1-
13
Work the Web Example
• The Internet provides a wealth of information
about individual companies
• One excellent site is finance.yahoo.com
• Click on the web surfer to go to the site,
choose a company and see what information
you can find!
1-
14
Financial Markets
• Cash flows to the firm
• Primary vs. secondary markets
– Dealer vs. auction markets
– Listed vs. over-the-counter securities
• NYSE
• NASDAQ
1-
15
Quick Quiz
• What are the three types of financial
management decisions and what questions
are they designed to answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
• What are agency problems and why do they
exist within a corporation?
• What is the difference between a primary
market and a secondary market?
1-
16
Ethics Issues
• Is it ethical for tobacco companies to sell a product
that is known to be addictive and a danger to the
health of the user? Is it relevant that the product is
legal?
• Should boards of directors consider only price when
faced with a buyout offer?
• Is it ethical to concentrate only on shareholder wealth,
or should stakeholders as a whole be considered?
• Should firms be penalized for attempting to improve
returns by stifling competition (e.g., Microsoft)?
1-
17
End of Chapter
1-
18

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Chap001 (1).pptx

  • 2. Key Concepts and Skills • Know the basic types of financial management decisions and the role of the financial manager • Know the financial implications of the different forms of business organization • Know the goal of financial management • Understand the conflicts of interest that can arise between owners and managers • Understand the various types of financial markets 1-1
  • 3. Chapter Outline • Corporate Finance and the Financial Manager • Forms of Business Organization • The Goal of Financial Management • The Agency Problem and Control of the Corporation • Financial Markets and the Corporation 1-2
  • 4. Corporate Finance • Some important questions that are answered using finance: – What long-term investments should the firm take on? – Where will we get the long-term financing to pay for the investment? – How will we manage the everyday financial activities of the firm? 1-3
  • 5. Financial Manager • Financial managers try to answer some or all of these questions • The top financial manager within a firm is usually the Chief Financial Officer (CFO) – Treasurer – oversees cash management, credit management, capital expenditures, and financial planning – Controller – oversees taxes, cost accounting, financial accounting and data processing Watch the video and explain: https://www.youtube.com/watch?v=AQdtc25jJfE& ab_channel=TheFinancialController 1-4
  • 6. Financial Management Decisions • Capital budgeting/Investment decision – What long-term investments or projects should the business take on? • Capital structure – How should we pay for our assets? – Should we use debt or equity? • Working capital management – How do we manage the day-to-day finances of the firm? 1-5
  • 7. Forms of Business Organization • Three major forms in the United States – Sole Proprietorship – Partnership • General • Limited – Corporation • C-Corp • S-Corp • Limited Liability Company 1-6
  • 8. Sole Proprietorship • Advantages – Easiest to start – Least regulated – Single owner keeps all the profits – Taxed once as personal income • Disadvantages – Limited to life of owner – Equity capital limited to owner’s personal wealth – Unlimited liability – Difficult to sell ownership interest 1-7
  • 9. Partnership • Advantages – Two or more owners – More capital available – Relatively easy to start – Income taxed once as personal income • Disadvantages – Unlimited liability • General partnership • Limited partnership – Partnership dissolves when one partner dies or wishes to sell – Difficult to transfer ownership 1-8
  • 10. Corporation • Advantages – Limited liability – Unlimited life – Separation of ownership and management – Transfer of ownership is easy – Easier to raise capital • Disadvantages – Separation of ownership and management – Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate) 1-9
  • 11. Goal of Financial Management • What should be the goal of a corporation? – Maximize profit? Profit= Revenue- Expense – Minimize costs? – Maximize market share? – Maximize the current value of the company’s stock?- Shareholder wealth maximization • Does this mean we should do anything and everything to maximize owner wealth? 1- 10
  • 12. The Agency Problem • Agency relationship – Principal hires an agent to represent his/her interests – Stockholders (principals) hire managers (agents) to run the company • Agency problem – Conflict of interest between principal and agent • Management goals and agency costs 1- 11
  • 14. Managing Managers • Managerial compensation – Incentives can be used to align management and stockholder interests – The incentives need to be structured carefully to make sure that they achieve their goal • Corporate control – The threat of a takeover may result in better management • Other stakeholders 1- 13
  • 15. Work the Web Example • The Internet provides a wealth of information about individual companies • One excellent site is finance.yahoo.com • Click on the web surfer to go to the site, choose a company and see what information you can find! 1- 14
  • 16. Financial Markets • Cash flows to the firm • Primary vs. secondary markets – Dealer vs. auction markets – Listed vs. over-the-counter securities • NYSE • NASDAQ 1- 15
  • 17. Quick Quiz • What are the three types of financial management decisions and what questions are they designed to answer? • What are the three major forms of business organization? • What is the goal of financial management? • What are agency problems and why do they exist within a corporation? • What is the difference between a primary market and a secondary market? 1- 16
  • 18. Ethics Issues • Is it ethical for tobacco companies to sell a product that is known to be addictive and a danger to the health of the user? Is it relevant that the product is legal? • Should boards of directors consider only price when faced with a buyout offer? • Is it ethical to concentrate only on shareholder wealth, or should stakeholders as a whole be considered? • Should firms be penalized for attempting to improve returns by stifling competition (e.g., Microsoft)? 1- 17