chapter 1 introduction to financial management. key concepts and skills know the basic financial...
TRANSCRIPT
Key Concepts and Skills
Know the basic financial management decisions and the financial manager’s role
Know the forms of business organization and the advantages/disadvantages of each
Know the goal of financial management Know the conflicts of interest that may
arise between owners and managers
Chapter Overview Finance: An Overview Business Finance and the Financial
Manager Forms of Business Organization The Goal of Financial Management The Agency Issue and Control of
the Corporation Financial Markets
Investments! Work with financial assets Value of financial assets, risk
versus return, asset allocation Job opportunities
Financial planner, stockbroker Portfolio manager Securities analyst CalPers and CalStrs
Financial Institutions
Banks: commercial banks, credit unions, savings and loans
Insurance companies Brokerage houses
Schwab Merrill Lynch Scottrade, Etrade
International Finance A specialized area within the other
areas of finance Work in foreign countries and travel Requires knowledge of exchange
rates and political risk Requires knowledge of other
cultures and possibly the ability to speak foreign language(s)
Reasons to Study Finance
Marketing Create budgets, perform marketing research,
market financial products Accounting
Preparation of financial statements, dual accounting/financial functions
Management Strategic thinking, performance, and
profitability Personal finance
Retirement planning, investing, daily cash flow
Business Finance
Questions the financial manager will answer: What long-term investments should
we make? How will we obtain long-term
financing to pay for the investments? How will we manage the daily
financial activities of the firm?
Financial Manager
Chief Financial Officer (CFO), the highest-level financial manager within a firm Treasurer: Oversees cash
management, credit management, capital expenditures, financial planning functions
Controller: Oversees taxes, cost accounting, financial accounting, and data processing functions
Forms of Business Organization There are three major forms of business
organization in the United States Sole proprietorship Partnership
General partnership Limited partnership
Corporation S-Corp Limited liability company (LLC)
Sole Proprietorship
Advantages Easiest to start Least regulated Single owner
retains profits Income taxed
once at personal income tax rate
Disadvantages Limited to the life
of the owner Equity capital
limited to owner’s personal wealth
Unlimited liability Difficult to sell
ownership interest
Partnership
Advantages Two or more
owners More available
capital Easy to start Income taxed
once at the personal income tax rate
Disadvantages Unlimited liability Partnership
dissolves when one partner dies or sells
Difficult to transfer ownership
Corporation Advantages
Limited liability Unlimited life Separation of
ownership and management
Ease of transfer of ownership
Ability to raise capital
Disadvantages Separation of
ownership and management (agency problem)
Double taxation(Income taxed at the corporate tax rate and dividends taxed at the personal tax rate)problem)
Goal of Financial Management
The goal of a corporation is to maximize the value of the firm’s stock
Sarbanes-Oxley Act Adopted in 2002 in response to
corporate mismanagement Scandals involved Enron, WorldCom,
Tyco, and Adelphia
Agency Issues The agency relationship
An agency relationship occurs when a principal hires an agent to represent his/her interest
Stockholders (principals) hire managers (agents) to represent their interests and manage the company
Agency problem A potential conflict of interest between the
owners and management of a firm Management interests and stockholders’
interests might differ - agency costs
Managerial Compensation and Control Managerial compensation
Incentives can help to align management and stockholders’ interests
Incentives must be carefully designed to ensure that they align management and stockholders’ interests
Corporate Control A hostile takeover threat/attempt may
result in better management
Managerial Compensation and Control (continued)
Employees, customers, suppliers, and the government (stakeholders) have a financial interest in the firm
Financial Markets Cash flows to the firm Primary market
The original sale of securities by governments and corporations
Secondary market One owner or creditor selling to
another Provide the means for transferring
ownership of corporate securities
Financial Markets (continued)
NASDAQ National Association of Securities
Dealers Automated Quotations system
A dealer market – an over-the-counter (OTC) market
Less stringent listing requirements than NYSE
Financial Markets (continued)
New York Stock Exchange An auction market Has a physical location on Wall Street Accounts for more than 85% of all
shares traded in auction markets
Quiz What are the major areas of corporate
finance? What is the capital budgeting decision? What is the mixture of long-term debt
and equity that a firm chooses to use called?
What are the three forms of business organization?
What is the difference between a general and a limited partnership?
Quiz (continued) What are the primary advantages and
disadvantages of sole proprietorships and partnerships?
What is the goal of financial management?
What is a dealer market? What is the largest auction market in
the United States? What does OTC stand for? What is the
largest OTC market for stocks called?