Financial Management

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10 Νοε 2013 (πριν από 3 χρόνια και 9 μήνες)

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Ch. 1
-

An Introduction to
Financial Management



2002, Prentice Hall, Inc.

What is a firm?


What is a firm?


What does it do?


How does it do it?

Goal of the Firm

1) Profit Maximization?


this goal ignores:


a) TIMING of Returns

(Time Value of Money
-

Ch. 5)

b) UNCERTAINTY of Returns

(Risk
-

Ch. 6)


Goal of the Firm

Timing of Profits

a.

Film Producer can produce one of two movies:


1.

Quick Movie for Video Release


2.

Epic Film for Theaters


Maximize Profits

Goal of the Firm

Profits




Movie 1


Movie 2

Year 1




$ 10




$ 0

Year 2




$ 0




$ 10



Timing of Profits

a.

Film Producer can produce one of two movies:


1.

Quick Movie for Video Release


2.

Epic Film for Theaters


Maximize Profits

Goal of the Firm

Profits




Movie 1


Movie 2

Year 1




$ 10




$ 0

Year 2




$ 0




$ 10

Which movie should be produced? Why?

Timing of Profits

a.

Film Producer can produce one of two movies:


1.

Quick Movie for Video Release


2.

Epic Film for Theaters


Maximize Profits

Goal of the Firm

Riskiness of Profits

a.

Film Producer can produce one of two movies:


1.

Quick Movie for Video Release


2.

Epic Film for Theaters

Profits
-
(Depend on Film Review)

Review


Movie 1


Movie 2

DD





$ 10



($ 10)

CD





$ 10




$ 10

CC





$ 10




$ 30



Maximize Profits

Goal of the Firm

Riskiness of Profits

a.

Film Producer can produce one of two movies:


1.

Quick Movie for Video Release


2.

Epic Film for Theaters

Profits
-
(Depend on Siskel & Ebert’s Review)

Review


Movie 1


Movie 2

DD





$ 10



($ 10)

CD





$ 10




$ 10

CC





$ 10




$ 30

Which movie should be produced? Why?

Goal of the Firm

2) Shareholder Wealth
Maximization?


this is the same as:


a) Maximizing Firm Value

b) Maximizing Stock Price

Legal Forms of Business

1)
Sole Proprietorship



Predominant Form



A business owned by a single individual.


Advantages


Easily Established


Minimal Organizational Costs


Keep all Generated Profits


Keep company’s operations secret


Owner maintains title to the firm’s assets.

Sole Proprietorship


Disadvantages


Unlimited Liability


Losses absorbed by owner


Limited Capital


Limited Life


2) Partnership


Similar to a sole proprietorship, except
that there are two or more owners.

2a) General Partnership



Advantages


Minimal Organizational Requirements


Negligible Government Regulations


Disadvantages


All Partners have Unlimited Liability


Losses absorbed by owners


Limited Life
-
Terminates at death of one partner

Legal Forms of Business

2b) Limited Partnership


Consists of one or more general partners,
who have unlimited liability, and


One or more limited partners (investors)
whose liability is limited to the amount of
their investment in the business.

3) Corporation



A business entity that legally functions separate
and apart from its owners.


Advantages


Limited Liability of Investors


Ease in Raising Capital


Continues after death of owner(s)


Ease in Hiring Professional Management


Provides Liquidity to Investors


Disadvantages


Tax Treatment of earnings (Double Taxation)


Time and Cost of Incorporation


Disclosure requirements


Legal Forms of Business

The Corporation and Financial
Markets

The Corporation and Financial
Markets

Corporation

The Corporation and Financial
Markets

Corporation

Investors

The Corporation and Financial
Markets

Government

Corporation

Investors

The Corporation and Financial
Markets

cash

Government

Corporation

Investors

The Corporation and Financial
Markets

cash

Government

securities

Corporation

Investors



The Corporation and Financial
Markets

Government

cash

securities

Corporation

Investors

Primary

markets



The Corporation and Financial
Markets

Government

cash

securities

Corporation

Investors

Secondary

markets



The Corporation and Financial
Markets

Government

cash

securities

Corporation

Investors

Secondary

markets

The Corporation and Financial
Markets

cash

Investors

Secondary

markets

Government

securities

Cash flow

Corporation

The Corporation and Financial
Markets

cash

Investors

Secondary

markets

Government

securities

Cash flow

tax

Corporation


The Corporation and Financial
Markets

cash

Investors

Secondary

markets

Government

securities

Cash flow

reinvest

tax

Corporation

The Corporation and Financial
Markets

cash

Investors

Secondary

markets

Government

securities

Cash flow

reinvest

tax

Corporation

dividends,

etc.

The Corporation and Financial
Markets


Primary Market


Primary Market


Market in which new issues of a
security are sold to initial buyers.

The Corporation and Financial
Markets


Primary Market


Market in which new issues of a
security are sold to initial buyers.


Secondary Market

The Corporation and Financial
Markets


Primary Market


Market in which new issues of a
security are sold to initial buyers.


Secondary Market


Market in which previously issued
securities are traded.



The Corporation and Financial
Markets


Initial Public Offering (IPO)

The Corporation and Financial
Markets


Initial Public Offering (IPO)


The first time the firm’s stock is
sold to the general public.


The Corporation and Financial
Markets


Initial Public Offering (IPO)


The first time the firm’s stock is
sold to the general public.


Seasoned New Issue


The Corporation and Financial
Markets


Initial Public Offering (IPO)


The first time the firm’s stock is
sold to the general public.


Seasoned New Issue


A new stock offering by a firm that
already has stock that is traded in
the secondary market.



The Corporation and Financial
Markets

Financial Management Axioms


1) Risk
-

return trade
-
off


2) Time value of money


3) Cash
-

not profits
-

is king


4) Incremental cash flows count


5) The curse of competitive markets


6) Efficient capital markets


7) The agency problem


8) Taxes bias business decisions


9) All risk is not equal


10) Ethical dilemmas are everywhere in finance