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

2. Finance Vs. Econ and Acct
What is Finance?
Finance Vs. Econ and Acct
Capital Budgeting
Capital Structure
Working Capital Management

3. Finance Financial Management (Corporate Finance). Capital Markets.
Investments.
Security Analysis
Portfolio Theory
Market Analysis

4. Finance Within the Organization
Board of Directors
Chief Executive Officer (CEO)
Chief Operating Officer (COO)
Marketing, Production, Human Resources, and Other Operating Departments
Chief Financial Officer (CFO)
Accounting, Treasury, Credit, Legal, Capital Budgeting, and Investor Relations

5. Stock Prices and Shareholder Value
The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price.
Value of any asset is present value of cash flow stream to owners.
Investors expect CF’s. Risky or not?
Most significant decisions are evaluated in terms of their financial consequences.
Production (Machine)
Marketing (Celebrity)

6. Stock Prices and Intrinsic Value
In equilibrium, a stock’s price should equal its “true” or intrinsic value.
Intrinsic value is a long-run concept.
To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value.
Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run.

7. Determinants of Intrinsic Values and Stock Prices
Managerial Actions, the Economic Environment, Taxes, and the Political Climate
“True” Investor Returns
“True” Risk
“Perceived” Investor Returns
“Perceived” Risk
Stock’s Intrinsic Value
Stock’s Market Price
Market Equilibrium: Intrinsic Value = Stock Price

8. Some Important Business Trends
Recent corporate scandals have reinforced the importance of business ethics, and have spurred additional regulations and corporate oversight.
Increased globalization of business.
The effects of ever-improving information technology
Corporate Governance

9. Business Ethics How should employees deal with unethical behavior?
Fudging the books or holding back important info.
Refuse to obey or report to a higher authority
Bankruptcies of Enron and WorldCom
Negative effect on the industry
Conflicts of profits and ethics
Norfolk Southern coal trains pollution
Merck and Vioxx pain medicine

10. Conflicts Between Managers and Stockholders
Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders).
But the following factors affect managerial behavior:
Managerial compensation packages
Direct intervention by shareholders
The threat of firing
The threat of takeover

11. Conflicts Between Stockholders and Bondholders
Stockholders are more likely to prefer riskier projects, because they receive more of the upside if the project succeeds. By contrast, bondholders receiving fixed payments are more interested in limiting risk.
Bondholders are particularly concerned about the use of additional debt.
Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions.

12. Forms of Business Organization
Proprietorship
Partnership
Corporation
LLC and LLP

13. Proprietorships and Partnerships
Advantages
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages
Difficult to raise capital
Unlimited liability
Limited life

14. 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