1. Ch. 1 - An Introduction to Financial Management  2002, Prentice Hall, Inc.

2. What is a firm?

3. What does it do? How does it do it?

4. Goal of the Firm 1) Profit Maximization? this goal ignores: a) TIMING of Returns (Time Value of Money - Ch. 5) b) UNCERTAINTY of Returns (Risk - Ch. 6)

5. Goal of the Firm Timing of Profits a.Film Producer can produce one of two movies: 1.Quick Movie for Video Release 2.Epic Film for Theaters Maximize Profits

6. Goal of the Firm Profits Movie 1Movie 2 Year 1 $ 10 $ 0 Year 2 $ 0 $ 10 Timing of Profits a.Film Producer can produce one of two movies: 1.Quick Movie for Video Release 2.Epic Film for Theaters Maximize Profits

7. Goal of the Firm Profits Movie 1Movie 2 Year 1 $ 10 $ 0 Year 2 $ 0 $ 10 Which movie should be produced? Why? Timing of Profits a.Film Producer can produce one of two movies: 1.Quick Movie for Video Release 2.Epic Film for Theaters Maximize Profits

8. Goal of the Firm Riskiness of Profits a.Film Producer can produce one of two movies: 1.Quick Movie for Video Release 2.Epic Film for Theaters Profits- (Depend on Film Review) ReviewMovie 1Movie 2   $ 10($ 10)   $ 10 $ 10   $ 10 $ 30 Maximize Profits

9. Goal of the Firm Riskiness of Profits a.Film Producer can produce one of two movies: 1.Quick Movie for Video Release 2.Epic Film for Theaters Profits- (Depend on Siskel & Ebert’s Review) ReviewMovie 1Movie 2   $ 10($ 10)   $ 10 $ 10   $ 10 $ 30 Which movie should be produced? Why?

10. Goal of the Firm 2) Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price

11. Legal Forms of Business 1)Sole Proprietorship Predominant Form A business owned by a single individual. –Advantages Easily Established Minimal Organizational Costs Keep all Generated Profits Keep company’s operations secret Owner maintains title to the firm’s assets.

12. Sole Proprietorship Disadvantages Unlimited Liability Losses absorbed by owner Limited Capital Limited Life

13. 2) Partnership Similar to a sole proprietorship, except that there are two or more owners.

14. 2a) General Partnership –Advantages Minimal Organizational Requirements Negligible Government Regulations –Disadvantages All Partners have Unlimited Liability Losses absorbed by owners Limited Life-Terminates at death of one partner Legal Forms of Business

15. 2b) Limited Partnership Consists of one or more general partners, who have unlimited liability, and One or more limited partners (investors) whose liability is limited to the amount of their investment in the business.

16. 3) Corporation A business entity that legally functions separate and apart from its owners. –Advantages Limited Liability of Investors Ease in Raising Capital Continues after death of owner(s) Ease in Hiring Professional Management Provides Liquidity to Investors –Disadvantages Tax Treatment of earnings (Double Taxation) Time and Cost of Incorporation Disclosure requirements Legal Forms of Business

17. The Corporation and Financial Markets

18. Corporation

19. The Corporation and Financial Markets CorporationInvestors

20. The Corporation and Financial Markets Government CorporationInvestors

21. The Corporation and Financial Markets cash Government CorporationInvestors

22. The Corporation and Financial Markets cash Government securities CorporationInvestors

23. The Corporation and Financial Markets Government cash securities CorporationInvestors Primary markets

24. The Corporation and Financial Markets Government cash securities CorporationInvestors Secondary markets

25. The Corporation and Financial Markets Government cash securities CorporationInvestors Secondary markets

26. The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow Corporation

27. The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow tax Corporation

28. The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow reinvest tax Corporation

29. The Corporation and Financial Markets cash Investors Secondary markets Government securities Cash flow reinvest tax Corporation dividends, etc.

30. The Corporation and Financial Markets Primary Market

31. –Market in which new issues of a security are sold to initial buyers. The Corporation and Financial Markets

32. Primary Market –Market in which new issues of a security are sold to initial buyers. Secondary Market The Corporation and Financial Markets

33. Primary Market –Market in which new issues of a security are sold to initial buyers. Secondary Market –Market in which previously issued securities are traded. The Corporation and Financial Markets

34. Initial Public Offering (IPO) The Corporation and Financial Markets

35. Initial Public Offering (IPO) –The first time the firm’s stock is sold to the general public. The Corporation and Financial Markets

36. Initial Public Offering (IPO) –The first time the firm’s stock is sold to the general public. Seasoned New Issue The Corporation and Financial Markets

37. Initial Public Offering (IPO) –The first time the firm’s stock is sold to the general public. Seasoned New Issue –A new stock offering by a firm that already has stock that is traded in the secondary market. The Corporation and Financial Markets

38. Financial Management Axioms 1) Risk - return trade-off 2) Time value of money 3) Cash - not profits - is king 4) Incremental cash flows count 5) The curse of competitive markets 6) Efficient capital markets 7) The agency problem 8) Taxes bias business decisions 9) All risk is not equal 10) Ethical dilemmas are everywhere in finance