1. 1 - 0 Copyright © 2001 by Harcourt, Inc.All rights reserved. Fundamentals of Financial Management Ninth Edition Copyright © 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777. ISBN 0-03-031478-X

2. 1 - 1 Copyright © 2001 by Harcourt, Inc.All rights reserved. Career opportunities Issues of the new millennium Forms of business organization Goals of the corporation Agency relationships CHAPTER 1 An Overview of Financial Management

3. 1 - 2 Copyright © 2001 by Harcourt, Inc.All rights reserved. Money and capital markets Investments Financial management Career Opportunities in Finance

4. 1 - 3 Copyright © 2001 by Harcourt, Inc.All rights reserved. Use of computers and electronic transfers of information The globalization of business Financial Management Issues of the new millennium

5. 1 - 4 Copyright © 2001 by Harcourt, Inc.All rights reserved. 3M51.726.9 Chase Manhattan27.826.6 Coca-Cola62.364.6 Exxon80.165.1 General Electric23.931.1 General Motors30.868.0 IBM56.868.9 McDonald’s60.871.7 Merck24.927.4 Walt Disney16.718.9 Percentage of Revenue and Net Income from Overseas Operations for 10 Well-Known Corporations, 1998 Percentage of Revenue Originated Net Income Company OverseasGenerated Overseas

6. 1 - 5 Copyright © 2001 by Harcourt, Inc.All rights reserved. Forecasting and planning Investment and financing decisions Coordination and control Transactions in the financial markets Managing risk Responsibilities of the Financial Staff

7. 1 - 6 Copyright © 2001 by Harcourt, Inc.All rights reserved. Sole proprietorship Partnership Corporation Alternative Forms of Business Organization

8. 1 - 7 Copyright © 2001 by Harcourt, Inc.All rights reserved. Advantages: Ease of formation Subject to few regulations No corporate income taxes Disadvantages: Limited life Unlimited liability Difficult to raise capital Sole Proprietorship

9. 1 - 8 Copyright © 2001 by Harcourt, Inc.All rights reserved. A partnership has roughly the same advantages and disadvantages as a sole proprietorship. Partnership

10. 1 - 9 Copyright © 2001 by Harcourt, Inc.All rights reserved. Advantages: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages: Double taxation Cost of set-up and report filing Corporation

11. 1 - 10 Copyright © 2001 by Harcourt, Inc.All rights reserved. The primary goal is shareholder wealth maximization, which translates to maximizing stock price. Do firms have any responsibilities to society at large? Is stock price maximization good or bad for society? Should firms behave ethically? Goals of the Corporation

12. 1 - 11 Copyright © 2001 by Harcourt, Inc.All rights reserved. An agency relationship exists whenever a principal hires an agent to act on their behalf. Within a corporation, agency relationships exist between: Shareholders and managers Shareholders and creditors Agency Relationships

13. 1 - 12 Copyright © 2001 by Harcourt, Inc.All rights reserved. Managers are naturally inclined to act in their own best interests. But the following factors affect managerial behavior: Managerial compensation plans Direct intervention by shareholders The threat of firing The threat of takeover Shareholders versus Managers

14. 1 - 13 Copyright © 2001 by Harcourt, Inc.All rights reserved. Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors. In the long run, such actions will raise the cost of debt and ultimately lower stock price. Shareholders versus Creditors

15. 1 - 14 Copyright © 2001 by Harcourt, Inc.All rights reserved. Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows Factors that Affect Stock Price

16. 1 - 15 Copyright © 2001 by Harcourt, Inc.All rights reserved. Factors that Affect the Level and Riskiness of Cash Flows Decisions made by financial managers: Investment decisions Financing decisions (the relative use of debt financing) Dividend policy decisions The external environment