Introduction to Financial Management

1
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 companys 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

• What are the four basic areas of finance?
• What are the three types of financial management
  decisions and what questions are they designed to
  answer?
• What are the three major forms of business
  organization? What are their advantages and
  disadvantages respectively?
• What is the goal of financial management?
• What are agency problems and why do they exist
  within a corporation?
• What is primary/secondary market? What is an
  auction/dealer market? What types of market are
  NYSE and NASDAQ respectively?