chapter 1 introduction to financial
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Chapter
1Introduction to Financial Management
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Basic Areas Of Finance
• Business finance• Investments• Financial institutions• (International Finance?)
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Business Finance
Various duties within companiesEvaluating past investments, analyzing future
projectsJob opportunities
Entry level – cost accountingAdvanced – financial analyst
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Investments
• Work with financial assets such as stocks and bonds
• Value financial assets and decide asset allocation• Job opportunities
• Stockbroker or financial advisor• Portfolio manager• Security analyst
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Financial Institutions
Companies that specialize in financial mattersBanks – commercial and investment, credit unions,
savings and loansInsurance companiesBrokerage firms
Job opportunitiesLoan officerInsurance agentBrokerage agent
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Why Study Finance?Marketing
Budgets, marketing research, marketing financial productsAccounting
Dual accounting and finance function, preparation of financial statements
Management Strategic thinking, job performance, profitability
Personal finance Budgeting, retirement planning, college planning, day-to-
day cash flow issues
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Forms of Business Organization
Three major forms in the United StatesSole proprietorshipPartnership
GeneralLimited
CorporationLimited liability company
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Sole Proprietorship
AdvantagesEasiest to startLeast regulatedSingle owner keeps all
the profitsTaxed once as personal
income
DisadvantagesLimited to life of
ownerEquity capital limited
to owner’s personal wealth
Unlimited liabilityDifficult to sell
ownership interest
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Partnership
AdvantagesTwo or more ownersMore capital availableRelatively easy to startIncome taxed once as
personal income
DisadvantagesPartnership dissolves
when one partner dies or wishes to sell
Difficult to transfer ownership
Unlimited liability?General partnershipLimited partnership
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Corporation
AdvantagesLimited liabilityUnlimited lifeSeparation of
ownership and management
Transfer of ownership is easy
Easier to raise capital
DisadvantagesSeparation of
ownership and management
Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)
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Goal Of Financial Management
What should be the goal of a sole proprietorship?
What should be the goal of a corporation?Maximize firm size?Maximize profits?Minimize costs?
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Goal Of Financial Management
Goal of corporation =
maximize shareholder wealth (maximize stock price)
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The Agency Problem
Agency relationshipPrincipal hires an agent to represent their interestStockholders (principals) hire managers (agents) to
run the companyAgency problem
Shareholders’ goals = stock price maximizationManagers’ goals = ???Conflict of interest between principal and agent
Management goals and agency costs
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Managing Managers
Managerial compensationIncentives can be used to align management and
stockholder interestsCorporate control
The threat of a takeover may result in better management
Other stakeholders
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Adam Smith’s “Invisible Hand”
Shareholder wealth maximization…
How a business succeeds: Produce a product consumers want Optimize quality/price for consumers Sell at a convenient location for consumers
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Quick Quiz
What are the three basic areas of finance?What are the three major forms of business
organization?What is the goal of financial management?What are agency problems and why do they
exist within a corporation?