Financial Management

northcarolinasweekManagement

Nov 10, 2013 (3 years and 11 months ago)

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Chapter 1
-

An Introduction to
Financial Management

08/28/08

Financial Management


What is financial management?


--

maintenance and creation of
economic value


--

deal with all kinds of financial
decisions, such as when to invest new
assets, when to borrow…

Goal of the Firm

1) Profit Maximization?


this goal ignores:


a) TIMING of Returns



b) Costs of shareholders



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



A business owned by a single individual.


Owner maintains title to the firm’s assets.


Owner has unlimited liability.


2) Partnership


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

2a) General Partnership



All partners have unlimited liability.


2b) Limited Partnership


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


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

Legal Forms of Business

2c) Limited Liability Company
(LLC)


Cross between a partnership and a
corporation.


Owners have limited liability, but the
firm runs and is taxed like a
partnership.

Legal Forms of Business

3) Corporation



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


Owners’ liability is limited to the amount
of their investment in the firm.


Owners hold common stock certificates,
and ownership can be transferred by
selling the certificates.

Legal Forms of Business

Comparison of Three Forms


Advantage of corporations:


--

limited liability


--

ease in raising capital

Role of Financial Manager


CFO


Chief Financial Officer: oversees
financial planning, corporate strategic
planning, and control cash flow


Treasurer


handles the firm’s financial
activities


Controller


manages the firm’s
accounting duties

The Corporation and
Financial Markets

cash

Investors

Secondary

markets

Government

securities

Cash flow

reinvest

tax

Corporation

dividends,

etc.


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 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.


--

a dollar get today is worth more than a
dollar get a year later

3) Cash
-

not profits
-

is king.


--

it is the cash that can be reinvested

4) Incremental cash flows count.

5) The curse of competitive markets.


--

differentiation


--

economies of scale

Financial Management Axioms

6) Efficient capital markets.


--

stock price adjust new information
fast

7) The agency problem.


--

managers don’t work for the interest
of shareholders


--

get benefit from salary, private jet


--

avoid risk project


Financial Management Axioms

8) Taxes bias business decisions.


--

after
-
tax incremental cash flow

9) All risk is not equal.


--

don’t put all eggs in one basket

10) Ethical dilemmas are everywhere in
finance.


--

Enron,
Worldcom


--

loss of public’s confidence