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Copyright 2002 by Harcourt, Inc. All rights reserved.

CHAPTER 1An 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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What causes a company to have aparticular stock value?

How can managers make choicesthat add value to their companies?

How can managers ensure thattheir companies dont run out ofcash while executing their plans?

What three questions does financial

management seek to answer?

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Institutions and capital markets

Investments

Financial management

Career Opportunities in Finance

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Sole proprietorship

Partnership

Corporation

Alternative Forms of

Business Organization

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Advantages:

Ease of formation

Subject to few regulationsNo corporate income taxes

Disadvantages:

Limited lifeUnlimited liability

Difficult to raise capital

Sole Proprietorship

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A partnership has roughly the same

advantages and disadvantages as asole proprietorship.

Partnership

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Advantages:

Unlimited life

Easy transfer of ownershipLimited liability

Ease of raising capital

Disadvantages:Double taxation

Cost of set-up and report filing

Corporation

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The primary goal is shareholder wealthmaximization, which translates to

maximizing stock price.Should firms behave ethically? YES!

Do firms have any responsibilities to

society at large? YES! Shareholdersare also members of society.

Goals of the Corporation

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Is maximizing stock price good for

society, employees, and customers?

Employment growth is higher in firmsthat 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 thegovernment but that have been soldto private investors

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Consumer welfare is higher incapitalist free market economiesthan in communist or socialisteconomies.

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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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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Sales

Current level

Short-term growth rate in salesLong-term sustainable growth rate in

sales

Operating expensesCapital expenses

Three Determinants of Cash Flows

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Factors that Affect the Level and

Risk of Cash FlowsDecisions made by financial

managers:

Investment decisions (productlines, production processes,geographic market, use oftechnology, marketing strategy)

Financing decisions (choice of debtpolicy 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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An agency relationship existswhenever a principal hires an agent

to act on his or her behalf.Within a corporation, agency

relationships exist between:

Shareholders and managersShareholders and creditors

Agency Relationships

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Managers are naturally inclined to actin their own best interests.

But the following factors affectmanagerial behavior:

Managerial compensation plans

Direct intervention by shareholdersThe threat of firing

The threat of takeover

Shareholders versus Managers

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Shareholders (through managers)

could take actions to maximizestock price that are detrimental tocreditors.

In the long run, such actions willraise the cost of debt andultimately lower stock price.

Shareholders versus Creditors

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