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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
CHAPTER 1
An Overview of Financial Management
?Role of financial management
?Career opportunities
?Forms of business organization
?Goals of the corporation
?Issues of the new millenium
?Agency relationships
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?What causes a company to have a
particular stock value?
?How can managers make choices
that add value to their companies?
?How can managers ensure that
their companies don’t run out of
cash while executing their plans?
What three questions does financial
management seek to answer?
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Institutions and capital markets
?Investments
?Financial management
Career Opportunities in Finance
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Sole proprietorship
?Partnership
?Corporation
Alternative Forms of
Business Organization
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Advantages:
?Ease of formation
?Subject to few regulations
?No corporate income taxes
?Disadvantages:
?Limited life
?Unlimited liability
?Difficult to raise capital
Sole Proprietorship
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?A partnership has roughly the same
advantages and disadvantages as a
sole proprietorship.
Partnership
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Advantages:
?Unlimited life
?Easy transfer of ownership
?Limited liability
?Ease of raising capital
?Disadvantages:
?Double taxation
?Cost of set-up and report filing
Corporation
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?The primary goal is shareholder wealth
maximization,which translates to
maximizing stock price.
?Should firms behave ethically? YES!
?Do firms have any responsibilities to
society at large? YES! Shareholders
are also members of society.
Goals of the Corporation
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
Is maximizing stock price good for
society,employees,and customers?
?Employment growth is higher in firms
that try to maximize stock price,On
average,employment goes up in,
?firms that make managers into
owners (such as LBO firms)
?firms that were owned by the
government but that have been sold
to private investors
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Consumer welfare is higher in
capitalist free market economies
than in communist or socialist
economies.
?Fortune lists the most admired firms,
In addition to high stock returns,
these firms have:
?high quality from customers’ view
?employees who like working there
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Amount of cash flows expected by
shareholders
?Timing of the cash flow stream
?Risk of the cash flows
Factors that Affect Stock Price
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Sales
?Current level
?Short-term growth rate in sales
?Long-term sustainable growth rate in
sales
?Operating expenses
?Capital expenses
Three Determinants of Cash Flows
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
Factors that Affect the Level and
Risk of Cash Flows
?Decisions made by financial
managers:
?Investment decisions (product
lines,production processes,
geographic market,use of
technology,marketing strategy)
?Financing decisions (choice of debt
policy and dividend policy)
?The external environment
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?Use of computers and electronic
transfers of information
?The globalization of business
Financial Management
Issues of the New Millenium
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?An agency relationship exists
whenever a principal hires an agent
to act on his or her behalf.
?Within a corporation,agency
relationships exist between:
?Shareholders and managers
?Shareholders and creditors
Agency Relationships
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Managers are naturally inclined to act
in their own best interests.
?But the following factors affect
managerial behavior:
?Managerial compensation plans
?Direct intervention by shareholders
?The threat of firing
?The threat of takeover
Shareholders versus Managers
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Copyright ? 2002 by Harcourt,Inc,All rights reserved.
?Shareholders (through managers)
could take actions to maximize
stock price that are detrimental to
creditors.
?In the long run,such actions will
raise the cost of debt and
ultimately lower stock price.
Shareholders versus Creditors