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

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

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

4. 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

5. Equation of Accounting
ASSET = LIABILITIES + STOCKHOLDERS’ EQUITY

6. Alternative Forms of Business Organization
Sole proprietorship
Partnership
Corporation

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

8. 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

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

10. 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.

11. 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).

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

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