THE GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT (Chapter 1)

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THE GOALS AND FUNCTIONS OFFINANCIAL MANAGEMENT
(Chapter 1)

• Field of Finance An Overview
• Goal of the Firm
• Agency Problem
• Business Ethics
• Forms of Business Organization
• Globalization
• Computerization

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Field of Finance An Overview
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Financial Management (Insiders)

• Investment Decisions - Assets
• Using Funds
• Financing Decisions - Debt and Equity
• Acquiring Funds
• MGMT 133, MGMT 134, MGMT 174
• MGMT 133 is oriented towards all business majors
  (not just finance majors)

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Investments (Outsiders)

• Security Analysis
• Portfolio Management
• MGMT 135
• MGMT 136

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Financial Markets

• Money and Capital Markets
• Primary and Secondary Markets
• Financial Institutions Banks, Insurance
  Companies, Credit Unions, Mutual Funds, Etc..
• Federal Reserve Interest Rates, Regulation
• MGMT 137, ECON 135

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Goal of the Firm

• Wealth Maximization
• Maximize the wealth of the firms existing common
  stockholders
• Wealth Defined
• Market Value of the firms common stock
• (Price per share)(number of shares)

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Goal of the Firm (Continued)

• Factors Affecting Price Per Share
• Earnings per share (EPS)
• Price/Earnings Ratio
• Timing of EPS
• Risk
• Problem With Earnings Maximization
• Ignores many of the important variables that
  impact on the stockholders well being (i.e..,
  wealth)

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Agency Problem

• Stockholders Versus Managers
• Managers, in light of their self interest, may at
  times make decisions that are not oriented
  towards maximizing stockholder wealth. This does
  not, however, invalidate the goal itself.
• Incentives for management to act in the
  stockholders best interest
• Threat of being fired - PERS is quite active
• Hostile takeover if stock price is too low
• Performance based salaries

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Business Ethics

• Ethics Defined
• Standards of conduct and moral judgment
• Unethical conduct may be obvious at times.
• Insider Trading
• Ethical dilemmas, however, can also exist.
• Profits and ethics sometimes conflict
• Often there is no clear-cut right or wrong answer

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Forms of Business Organization

• Sole Proprietorship
• About 75 of all firms
• Partnership
• Corporation
• About 90 of all sales dollars

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Sole Proprietorship

• A single owner
• Unlimited liability
• Taxed at personal income tax rates
• Easiest and least expensive to establish
• Market value of firm difficult to estimate
• Difficult to raise equity capital

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Partnership

• Two or more owners
• Unlimited liability
• Taxed at personal income tax rates
• Not too costly to establish
• Market value of firm difficult to estimate
• Difficult to raise equity capital
• Easier to raise capital compared to a sole
  proprietorship, however.

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Corporation (Publicly Traded)

• Unlimited life
• Legal entity
• Easy to transfer ownership
• Limited liability of stockholders
• Double taxation
• Corporate earnings taxed
• Stockholders dividends taxed
• Most attractive form for raising capital
• Market Value easy to determine

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Hybrid Forms of Organization

• Limited partnership
• Liability limited to investment
• Subchapter S Corporation
• Shareholders enjoy limited liability, but income
  is taxed at personal income rates.

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Globalization

• Financial managers must have a multinational
  perspective regarding many decisions
• Various international aspects of financial
  management will be introduced throughout the
  semester

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Technology

• Strong computer skills are essential
• Internet and World Wide Web
• Electronic Commerce