1. 1 - 0 Copyright © 2002 by Harcourt, Inc.All rights reserved. Career opportunities Issues of the new millennium Forms of business organization Goals of the corporation Agency relationships CHAPTER 1 An Overview of Financial Management

2. 1 - 1 Copyright © 2002 by Harcourt, Inc.All rights reserved. Money and capital markets Investments Financial management Career Opportunities in Finance

3. 1 - 2 Copyright © 2002 by Harcourt, Inc.All rights reserved. Forecasting and planning Investment and financing decisions Coordination and control Transactions in the financial markets Managing risk Responsibilities of the Financial Staff

4. 1 - 3 Copyright © 2002 by Harcourt, Inc.All rights reserved. Use of computers and electronic transfers of information The globalization of business Financial Management Issues of the New Millennium

5. 1 - 4 Copyright © 2002 by Harcourt, Inc.All rights reserved. Financial Management Issues of the New Millennium The effect of changing technology The globalization of business

6. 1 - 5 Copyright © 2002 by Harcourt, Inc.All rights reserved. Percentage of Revenue and Net Income from Overseas Operations for 10 Well-Known Corporations, 2001 Company% of Revenue from overseas % of Net Income from overseas Coca-Cola60.835.9 Exxon Mobil69.460.2 General Electric32.625.2 General Motors26.160.6 IBM57.948.4 JP Morgan Chase & Co. 35.551.7 McDonald’s63.161.7 Merck18.358.1 3M52.947.0 Sears, Roebuck10.57.8

7. 1 - 6 Copyright © 2002 by Harcourt, Inc.All rights reserved. Sole proprietorship Partnership Corporation Alternative Forms of Business Organization

8. 1 - 7 Copyright © 2002 by Harcourt, Inc.All rights reserved. Advantages: Ease of formation Subject to few regulations No corporate income taxes Disadvantages: Limited life Unlimited liability Difficult to raise capital Sole Proprietorship

9. 1 - 8 Copyright © 2002 by Harcourt, Inc.All rights reserved. A partnership has roughly the same advantages and disadvantages as a sole proprietorship. Partnership

10. 1 - 9 Copyright © 2002 by Harcourt, Inc.All rights reserved. Advantages: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages: Double taxation Cost of set-up and report filing Corporation

11. 1 - 10 Copyright © 2002 by Harcourt, Inc.All rights reserved. Role of Finance in a Typical Business Organization

12. 1 - 11 Copyright © 2002 by Harcourt, Inc.All rights reserved. The primary goal is shareholder wealth maximization, which translates to maximizing stock price. Do firms have any responsibilities to society at large? Is stock price maximization good or bad for society? Should firms behave ethically? Goals of the Corporation

13. 1 - 12 Copyright © 2002 by Harcourt, Inc.All rights reserved. An agency relationship exists whenever a principal hires an agent to act on their behalf. Within a corporation, agency relationships exist between: Shareholders and managers Shareholders and creditors Agency Relationships

14. 1 - 13 Copyright © 2002 by Harcourt, Inc.All rights reserved. Managers are naturally inclined to act in their own best interests. But the following factors affect managerial behavior: Managerial compensation plans Direct intervention by shareholders The threat of firing The threat of takeover Shareholders versus Managers

15. 1 - 14 Copyright © 2002 by Harcourt, Inc.All rights reserved. Shareholders (through managers) could take risky actions to maximize stock price, but are detrimental to creditors. In the long run, such actions will raise the cost of debt and ultimately lower stock price. Shareholders versus Creditors

16. 1 - 15 Copyright © 2002 by Harcourt, Inc.All rights reserved. Does profit maximization equal stock price maximization? No, there is generally a high correlation between EPS, cash flow, and stock price, but today’s stock price relies not only on current earnings, but future earnings and cash flows. Some actions may increase earnings, yet cause stock price to decrease (and vice versa).

17. 1 - 16 Copyright © 2002 by Harcourt, Inc.All rights reserved. Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows Factors that Affect Stock Price

18. 1 - 17 Copyright © 2002 by Harcourt, Inc.All rights reserved. Basic Valuation Model To estimate an asset’s value, one estimates the cash flow for each period t (CF t ), the life of the asset (n), and the appropriate discount rate (k) Throughout the course, we discuss how to estimate the inputs and how financial management is used to improve them and thus maximize a firm’s value.

19. 1 - 18 Copyright © 2002 by Harcourt, Inc.All rights reserved. Factors that Affect the Level and Riskiness of Cash Flows Decisions made by financial managers: Investment decisions Financing decisions (the relative use of debt financing) Dividend policy decisions The external environment