What is Finance

1
What is Finance?

• Finance deals with decisions concerning cash
  inflows and cash outflows.
• Emphasis is on cash flows rather than income
  because most liabilitiesthat is, debtsmust be
  paid with cash.
• Everything else being equal
• More value is preferred to less.
• The sooner cash is received the more value it
  has.
• Less risky assets are more valuable than riskier
  assets.

2
Importance of Managerial Finance in Nonfinance
Areas

• Most business decisions cannot be made without
  considering the impact on the financial
  well-being of the firm.
• Must determine whether the funds needed to
  implement decisions are available.

3
General Areas of Finance

• Financial Markets and Institutions
• Investments
• Financial Services
• Managerial Finance

4
Alternative Forms of Business Organization

• Proprietorship
• Partnership
• Corporation
• Hybrid Forms of Business

5
Proprietorship70-75

• Advantages
• easy and relatively inexpensive to form
• affected by few regulations
• business is taxed as an individual
• Disadvantages
• unlimited personal liability
• firms life is limited
• ownership transfer can be difficult
• firms credit and its ability to raise funds

6
Partnershipabout 10

• Advantages
• easy and relatively inexpensive to form
• affected by few regulations
• business is taxed as an individual
• Disadvantages
• unlimited personal liability
• firms life is limited
• ownership transfer can be difficult
• firms credit and its ability to raise
  fundsbetter than for a proprietorship

7
Corporation15-20

• Advantages
• limited liability
• unlimited life
• easy transfer of ownership
• ease of raising capital
• Disadvantages
• cost of set-up and filing financial reports
• double taxation

8
Hybrid Forms of Business

• Limited Liability Partnership (LLP)
• some partners have limited liability
• must be one general partner
• Limited Liability Company (LLC)
• taxed like a partnership, but owners have limited
  liability
• flexible ownership structure
• S Corporation
• fewer than 100 stockholders
• taxed like a partnership

9
Goals of the Corporation

• Maximize wealth
• Should be the primary goal of the financial
  manager.
• Social Responsibility
• Firms should be socially responsible at the same
  time they earn normal profits.
• Wealth Maximization Social Responsibility
• Actions that maximize the value of the firm also
  are beneficial to society wealth maximization
  improves the standard of living.

10
Agency Relationships

• An agency relationship exists when owners do not
  manage the firms day-to-day operations.
• An agency problem exists if managers attempt to
  satisfy interests that differ from the best
  interests of the firms owners.
• Two important agency relationships that exist are
  between managers and stockholders and
  stockholders and creditors.

11
Stockholders versus Managers

• An agency problem is possible if owners do not
  run the company.
• An agency problem can be mitigated by the
  following means
• threat of firing
• takeover threat
• reward managers for acting in the best interests
  of owners
• make managers owners

12
Stockholders versus Creditors

• If stockholders approve actions that harm the
  positions of the firms creditors, it is likely
  that the firm will find it difficult to borrow
  funds in the future.

13
Business Ethics

• Webster A standard of conduct and moral
  behavior.
• Business Ethics A companys attitude and
  conduct toward its employees, customers,
  community, and investors (debt holders and
  stockholders)

14
Corporate Governance

• The set of rules that a firm follows when
  conducting business
• As a result of the Sarbanes-Oxley Act of 2002,
  firms are revising their corporate governance
  policies
• Good corporate governance generates higher
  returns to stockholders

15
Forms of Business in Other Countries (Foreign
Companies)

• Most businesses that are based outside the United
  States are closed organizations in the sense
  that they have more concentrated ownershipthat
  is, fewer owners.

16
Multinational Corporations

• Firms go international to
• seek new markets
• seek raw materials
• seek new technology
• seek production efficiency
• avoid political and regulatory hurdles

17
Factors that Distinguish Domestic Firms from
Multinational Firms

• different currency denominations
• economic and legal ramifications
• language differences
• cultural differences
• government involvement
• political risk