An Overview of Financial Management CHAPTER 1 An Overview of Financial Management

Finance is all about…. Financing Activities Investing Activities Dividend Policy

Career Opportunities in Finance Money and capital markets (e.g. Banks, insurance companies, mutual funds) Investments (e.g. Brokerage House) Financial management

Responsibility of the Financial Staff Maximizing Shareholders’ Wealth by: Forecasting and planning Investment and financing decisions Transactions in the financial markets Managing risk Coordination and Control

Equation of Accounting ASSET = LIABILITIES + STOCKHOLDERS’ EQUITY

Alternative Forms of Business Organization Sole proprietorship Partnership Corporation

Sole proprietorships & Partnerships Advantages Ease of formation Subject to few regulations No corporate income taxes Disadvantages Difficult to raise capital Unlimited liability Limited life

Corporation Advantages Disadvantages Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages Double taxation Cost of set-up and report filing

Financial Goals of the Corporation The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price. Should firms behave ethically?

Ethics in Financial Reporting Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics. Recent financial scandals include: Enron, WorldCom, Xerox Corp. and others. Effective financial reporting depends on sound ethical behavior.

Is stock price maximization the same as profit maximization? No, despite a generally high correlation amongst stock price, EPS, and cash flow. Current stock price relies upon current earnings, as well as future earnings and cash flow. Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa).

Factors that affect stock price Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows

Some Core Principles of Finance… The Risk-Return Trade off The time value of Money Cash – Not Profit – is our interest Efficient Capital Market