1. 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

2. 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

3. 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

4. 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

5. 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)

6. Finance Manager  Who is the Financial Manager?

7. 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

8. 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

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

10. 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)

11. 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

12. 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.

13. 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?