Chapter 1 - Financial Management  Learning Objectives  Describe the “Cycle of Money”  Distinguish the four main areas of finance  Discuss financial markets  Discuss the financial management  Identify the goal of finance  Explain the interactions of a finance manager  Delineate the forms of business  Illustrate Agency Theory  Review corporate governance and ethics

Finance Function  Finance is about making decisions  What and When to buy  What and When to sell  Art and Science of managing wealth  Cycle of Money -- Moving Money  From lenders to borrowers  Returning money from borrowers to lenders  See Diagram on Page 2

Cycle of Money  Cycle of Money -- Moving Money  Risk of return…compensation is interest  Institutions  Banks – Financial Intermediaries  Takes on risk of nonpayment for a fee  Advantage of Using Institution  For lender – ready partner with known rates  For lender – reduction or elimination of default risk  For borrower – ready partner with known rates  For both – reduction of search time

Finance Areas  Corporate Finance  Activities that support business operations  Long and short term activities  Investments  Buying and Selling Securities  Trading Rules and Regulations  Financial Institutions – Banks, Insurance, Etc.  International Finance  Companies with operations in multiple countries  Foreign governments and currency issues

Financial Markets  Financial Markets – By Instrument  Equity Markets – Stocks  Debt Markets – Bonds and Loans  Futures Markets – Futures Contracts  Derivatives Markets – Calls and Puts  Foreign Exchange Markets – Currencies  Financial Markets – Other Categories  Primary and Secondary  Auction and Dealer  Money Markets and Capital Markets (Maturity)

Finance Manager  Who is the Financial Manager?

Financial Management  Financial Managers  Chief Financial Officer (CFO)  Any individual making financial decisions  YOU  Finance Decision Areas  Capital Budgeting (What to Buy or Sell)  Capital Structure (How to finance the purchase)  Working Capital Management (Daily operating levels)  Goal – Maximize the wealth of the owner  Maximize current share price  Increase the current equity value of the company

Goal of Finance  Closer Look at Financial Goal  Net income or profits of the firm?  Cash flow?  Maximize Current Stock Price  Trade-offs  Safe and Happy Work Place  Customers Happy  Good Relationship with Surrounding Community  Broad Definition of Stock Price Impact  Social Welfare  Job Security  Ethical and Legal Actions

The Financial Manager in the Organization (Players) CEO Marketing Manager Finance Manager TreasurerController Investor Relations Manufacturing Manager Information Manager Human Resource Manager.

Types of Business Organizations  Sole Proprietorships  Simple and Most Common  Personal Assets Co-mingled w/ Company  Partnership  Added capital and people  Ownership Transfer difficult  Corporation  Legal Separate Entity  Limited Liability of Owners (Stockholders)

Principal and Agent Setting  Agency Theory  Principal and Agent  Agent works for and in the interest of the Principal  Agent has personal interests as well  Company and personal interests are not always aligned  Principal (Owner) influences Agent  Reward good behavior  Punish bad behavior  Problems with Observing Behavior (Effort)  Adding costs to ensure appropriate behavior (effort)  Agency costs

Corporate Governance  Corporate Governance  How a company conducts its business  Fair and Honest vs. Exploiting Situations  Laws and Regulations  Designed to force fair and honest?  Reaction to Exploiting Activities?  Most Recent: Sarbanes - Oakley  Reaction to Enron, World Com, etc.

Chapter 1 -- Homework  Question #2 – Example of Cycle of Money  Question #6 – Decisions in finance areas  Question # 9 – Parent – Child Conflict  Question #10 – Jackson Hole Employees  Current agency cost  Possible Solutions  Possible Costs to each Solution  Direct and Indirect  Best choice?