Introduction to Financial

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Nov 9, 2013 (3 years and 11 months ago)

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-
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Hill/Irwin

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Introduction to Financial
Management

Chapter 1

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Chapter Outline

1.
Basic Areas of Finance

2.
Financial Management Decisions

3.
Forms of Organization

4.
Goal of Financial Management

5.
The Agency Problem

6.
Financial Markets

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1.Basic Areas Of Finance


Corporate finance (Business finance)


Investments


Financial institutions


International finance

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Corporate Finance


The study of financial decision making in business
organizations.


The study of basic techniques a financial manager should
have.

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2.Financial Management Decisions


Capital budgeting


What long
-
term investments or projects should we take on?


About size, timing and riskiness of future cash flows.


Capital structure


How should we raise fund? Should we use debt or equity?


Concerns about the mix of sources of funds, such as debt
(borrowing) and equity (ownership interest), used.


Working capital management


How do we manage the day
-
to
-
day finances of the firm?


Concerns about management of short
-
term assets and
liabilities

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3. Forms of Organization


Three major forms in the united states


Sole proprietorship: A business owned by a single individual.


Partnership: A business formed by two or more individuals
or entities.


General: unlimited liability for all partners


Limited: general partners vs. limited partners


Corporation: A business created as a distinct legal entity
owned by one or more individuals or entities.


S
-
Corp: a form of small corporation taxed like a partnership
thus avoids double taxation


Limited liability company: operate and taxed like a partnership
but retain limited liability for owners

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Corporation


Advantages


Limited liability


Unlimited life


Separation of ownership and
management


Transfer of ownership is
easy


Easier to raise capital


Disadvantages


Separation of ownership and
management


Double taxation (income
taxed at the corporate rate
and then dividends taxed at
personal rate)

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4.Goal Of Financial Management


What should be the goal of a corporation?


Maximize profit?


Minimize costs?


Maximize market share?


Maximize the current value of the company’s stock?

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5.The Agency Problem


Agency relationship


Principal hires an agent to represent their interest


Stockholders (principals) hire managers (agents) to run the
company


Agency problem


Conflict of interest between principal and agent


Management goals and agency costs


Agency costs: the costs of the conflict of interest between
stockholders (principals) and management (agents).



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Managing Managers


Managerial compensation


Incentives can be used to align management and stockholder
interests


The incentives need to be structured carefully to make sure
that they achieve their goal


Corporate control


The threat of a takeover may result in better management

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6.Financial Markets


Cash flows to the firm (Figure 1.2)


Primary markets: original sale by governments and
corporations


Public offerings vs. private placement


Secondary markets: securities bought and sold after the
original sale


NYSE

(New York Stock Exchange) vs.
NASDAQ

(National Association of Security Dealers Automated
Quotations system)


Auction vs. dealer markets


Listed (stocks that trade on an exchange are said to be listed)
vs. over the counter securities

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Figure 1.2

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Review Questions

1.
What are the four basic areas of finance?

2.
What are the three types of financial management
decisions and what questions are they designed to answer?

3.
What are the three major forms of business organization?
What are their advantages and disadvantages respectively?

4.
What is the goal of financial management?

5.
What are agency problems and why do they exist within a
corporation?

6.
What is primary/secondary market? What is an
auction/dealer market? What types of market are NYSE
and NASDAQ respectively?