Ch. 1 - An Introduction to Financial Management  2002, Prentice Hall, Inc.

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Presentation transcript:

Ch. 1 - An Introduction to Financial Management  2002, Prentice Hall, Inc.

Goal of the Firm 1) Profit Maximization? this goal ignores: a) TIMING of Returns (Time Value of Money - Ch. 5) b) UNCERTAINTY of Returns (Risk - Ch. 6)

Goal of the Firm 2) Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price

Legal Forms of Business 1) Sole Proprietorship A business owned by a single individual. Owner maintains title to the firm’s assets. Owner has unlimited liability. 2) Partnership Similar to a sole proprietorship, except that there are two or more owners.

2a) General Partnership All partners have unlimited liability. 2b) Limited Partnership Consists of one or more general partners, who have unlimited liability, and One or more limited partners (investors) whose liability is limited to the amount of their investment in the business. Legal Forms of Business

3) Corporation A business entity that legally functions separate and apart from its owners. Owners’ liability is limited to the amount of their investment in the firm. Owners hold common stock certificates, and ownership can be transferred by selling the certificates. Legal Forms of Business

The Corporation and Financial Markets

Corporation

The Corporation and Financial Markets CorporationInvestors

The Corporation and Financial Markets Government CorporationInvestors

The Corporation and Financial Markets cash Government CorporationInvestors

The Corporation and Financial Markets cash Government securities CorporationInvestors

The Corporation and Financial Markets Government cash securities CorporationInvestors Secondary markets

The Corporation and Financial Markets Government cash securities CorporationInvestors Secondary markets

The Corporation and Financial Markets Government cash securities CorporationInvestors Secondary markets

The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow Corporation

The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow tax Corporation

The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow reinvest tax Corporation

The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow reinvest tax Corporation dividends, etc.

The Corporation and Financial Markets Primary Market

–Market in which new issues of a security are sold to initial buyers. The Corporation and Financial Markets

Primary Market –Market in which new issues of a security are sold to initial buyers. Secondary Market The Corporation and Financial Markets

Primary Market –Market in which new issues of a security are sold to initial buyers. Secondary Market –Market in which previously issued securities are traded. The Corporation and Financial Markets

Initial Public Offering (IPO) The Corporation and Financial Markets

Initial Public Offering (IPO) –The first time the firm’s stock is sold to the general public. The Corporation and Financial Markets

Initial Public Offering (IPO) –The first time the firm’s stock is sold to the general public. Seasoned New Issue The Corporation and Financial Markets

Initial Public Offering (IPO) –The first time the firm’s stock is sold to the general public. Seasoned New Issue –A new stock offering by a firm that already has stock that is traded in the secondary market. The Corporation and Financial Markets

Financial Management Axioms 1) Risk - return trade-off 2) Time value of money 3) Cash - not profits - is king 4) Incremental cash flows count 5) The curse of competitive markets 6) Efficient capital markets 7) The agency problem 8) Taxes bias business decisions 9) All risk is not equal 10) Ethical dilemmas are everywhere in finance

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