Introduction to Financial Management PDF

Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Chapter Outline 1.1 Finance: A Quick Look 1.2 Business Finance and The Financial Mana...

Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Chapter Outline 1.1 Finance: A Quick Look 1.2 Business Finance and The Financial Manager 1.3 Forms of Business Organization 1.4 The Goal of Financial Management 1.5 The Agency Problem and Control of the Corporation 1-2 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Basic Areas of Finance Traditionally, financial topics are grouped into four main areas: 1. Corporate finance - Main subject of this course 2. Investments 3. Financial institutions 4. International finance Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-3  Investments Work with financial assets such as stocks and bonds Value of financial assets, risk versus return, and asset allocation Job opportunities – Stockbroker or financial advisor – Portfolio manager – Security analyst Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-4  Financial Institutions Companies that specialize in financial matters – Banks—commercial and investment, credit unions, savings and loans – Insurance companies – Brokerage firms Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-5  International Finance An area of specialization within each of the areas discussed so far May allow you to work in other countries or at least travel on a regular basis Need to be familiar with exchange rates and political risk Need to understand the customs of other countries; speaking a foreign language fluently is also1-6 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Why Study Finance? Marketing – Budgets, marketing research, marketing financial products Accounting – Dual accounting and finance function, preparation of financial statements Management – Strategic thinking, job performance, profitability Personal finance – Budgeting, retirement planning, college planning, day-to-day cash flow issues Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-7  Business 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 investments? – How will we manage the everyday financial activities of the firm? Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-8  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 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-9  Corporate Organization Chart Figure 1.1 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-10  Financial Management Decisions Capital budgeting – 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? Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-11  Forms of Business Organization Three major forms in the United States Sole proprietorship Partnership – General – Limited Corporation – S-Corp – Limited liability company Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-12  Sole Proprietorship Business owned by one person Advantages Disadvantages – Easiest to start – Limited to life of – Least regulated owner – Single owner keeps – Equity capital limited all of the profits to owner’s personal – Taxed once as wealth personal income – Unlimited liability – Difficult to sell ownership interest Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-13  Partnership Business owned by two or more persons Advantages Disadvantages – Two or more owners – Unlimited liability – More capital General available partnership – Relatively easy to Limited start partnership – Income taxed once – Partnership dissolves as personal income when one partner dies or wishes to sell – Difficult to transfer ownership 1-14 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Corporation A legal “person” distinct from owners and a resident of a state Advantages Disadvantages – Limited liability – Separation of ownership – Unlimited life and management – Separation of ownership (agency problem) and management – Double taxation (income – Transfer of ownership is taxed at the corporate easy rate and then dividends – Easier to raise capital taxed at personal rate, while dividends paid are not tax deductible) Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-15  International Corporate Forms All of these forms feature public ownership and limited liability Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-16  Goal of Financial Management (1 of 2) What should be the goal of a corporation? – Maximize profit? – Minimize costs? – Maximize market share? – Maximize the current value per share of the company’s existing stock – Maximize the market value of the existing owners’ equity Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-17  Goal of Financial Management (2 of 2) Does this mean we should do anything and everything to maximize owner wealth? – Outsourcing? – Off-shoring? – Enron? Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-18  Sarbanes-Oxley Act (SarBox, 2002) Driven by corporate scandals – Enron, Tyco, WorldCom, Adelphia Intended to strengthen protection against accounting fraud and financial malpractice Compliance very costly – Firms driven to: Go public outside the U.S. Go private (“go dark”) Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-19  The Agency Problem Agency relationship – Principal hires an agent to represent its interests – Stockholders (principals) hire managers (agents) to run the company. Agency problem – Conflict of interest between principal and agent Management goals and agency costs 1-20 Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Do Managers Act in the Shareholders’ Interests? Managerial compensation – Incentives can be used to align management and stockholder interests. – Incentives need to be carefully structured to ensure that they achieve their goal. Corporate control – Threat of a takeover may result in better management Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-21  Cash Flows Between the Firm and the Financial Markets Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-22  Financial Markets Cash flows to the firm Primary vs. secondary markets – Primary: Raises money for the corporation – Secondary: Provides the means for transferring ownership of securities NYSE Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without 1-23 the prior written consent of McGraw-Hill Education.  Chapter 1 END Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-24