1. Introduction to Financial Management
Chapter 1
Introduction to Financial Management

2. Key Concepts and Skills
Know the basic financial management decisions and the financial manager’s role
Know the forms of business organization and the advantages/disadvantages of each
Know the goal of financial management
Know the conflicts of interest that may arise between owners and managers

3. Chapter Overview Finance: An Overview
Business Finance and the Financial Manager
Forms of Business Organization
The Goal of Financial Management
The Agency Issue and Control of the Corporation
Financial Markets

4. Areas of Finance Corporate finance Investments Financial Institutions
International finance

5. Investments! Work with financial assets
Value of financial assets, risk versus return, asset allocation
Job opportunities
Financial planner, stockbroker
Portfolio manager
Securities analyst
CalPers and CalStrs

6. Financial Institutions
Banks: commercial banks, credit unions, savings and loans
Insurance companies
Brokerage houses
Schwab
Merrill Lynch
Scottrade, Etrade

7. International Finance
A specialized area within the other areas of finance
Work in foreign countries and travel
Requires knowledge of exchange rates and political risk
Requires knowledge of other cultures and possibly the ability to speak foreign language(s)

8. Reasons to Study Finance
Marketing
Create budgets, perform marketing research, market financial products
Accounting
Preparation of financial statements, dual accounting/financial functions
Management
Strategic thinking, performance, and profitability
Personal finance
Retirement planning, investing, daily cash flow

9. Business Finance Questions the financial manager will answer:
What long-term investments should we make?
How will we obtain long-term financing to pay for the investments?
How will we manage the daily financial activities of the firm?

10. Financial Manager
Chief Financial Officer (CFO), the highest-level financial manager within a firm
Treasurer: Oversees cash management, credit management, capital expenditures, financial planning functions
Controller: Oversees taxes, cost accounting, financial accounting, and data processing functions

11. Forms of Business Organization
There are three major forms of business organization in the United States
Sole proprietorship
Partnership
General partnership
Limited partnership
Corporation
S-Corp
Limited liability company (LLC)

12. Sole Proprietorship Advantages Disadvantages Easiest to start
Least regulated
Single owner retains profits
Income taxed once at personal income tax rate
Disadvantages
Limited to the life of the owner
Equity capital limited to owner’s personal wealth
Unlimited liability
Difficult to sell ownership interest

13. Partnership Advantages Disadvantages Two or more owners
More available capital
Easy to start
Income taxed once at the personal income tax rate
Disadvantages
Unlimited liability
Partnership dissolves when one partner dies or sells
Difficult to transfer ownership

14. Corporation Advantages Disadvantages Limited liability Unlimited life
Separation of ownership and management
Ease of transfer of ownership
Ability to raise capital
Disadvantages
Separation of ownership and management (agency problem)
Double taxation
(Income taxed at the corporate tax rate and dividends taxed at the personal tax rate)problem)

15. Goal of Financial Management
The goal of a corporation is to maximize the value of the firm’s stock
Sarbanes-Oxley Act
Adopted in 2002 in response to corporate mismanagement
Scandals involved Enron, WorldCom, Tyco, and Adelphia

16. Agency Issues The agency relationship Agency problem
An agency relationship occurs when a principal hires an agent to represent his/her interest
Stockholders (principals) hire managers (agents) to represent their interests and manage the company
Agency problem
A potential conflict of interest between the owners and management of a firm
Management interests and stockholders’ interests might differ - agency costs

17. Managerial Compensation and Control
Incentives can help to align management and stockholders’ interests
Incentives must be carefully designed to ensure that they align management and stockholders’ interests
Corporate Control
A hostile takeover threat/attempt may result in better management

18. Managerial Compensation and Control (continued)
Employees, customers, suppliers, and the government (stakeholders) have a financial interest in the firm

19. Financial Markets Cash flows to the firm Primary market
The original sale of securities by governments and corporations
Secondary market
One owner or creditor selling to another
Provide the means for transferring ownership of corporate securities

20. Financial Markets (continued)
NASDAQ
National Association of Securities Dealers Automated Quotations system
A dealer market – an over-the-counter (OTC) market
Less stringent listing requirements than NYSE

21. Financial Markets (continued)
New York Stock Exchange
An auction market
Has a physical location on Wall Street
Accounts for more than 85% of all shares traded in auction markets

22. Quiz What are the major areas of corporate finance?
What is the capital budgeting decision?
What is the mixture of long-term debt and equity that a firm chooses to use called?
What are the three forms of business organization?
What is the difference between a general and a limited partnership?

23. Quiz (continued)
What are the primary advantages and disadvantages of sole proprietorships and partnerships?
What is the goal of financial management?
What is a dealer market?
What is the largest auction market in the United States?
What does OTC stand for? What is the largest OTC market for stocks called?