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Fundamentals of Financial Management: Concise Third Edition

Copyright 2002 by Harcourt, Inc.
All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
Copyright 2002 by Harcourt, Inc. All rights reserved.

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CHAPTER 1
An Overview of Financial Management Career opportunities

Issues of the new millennium

Forms of business organization

Goals of the corporation

Agency relationships
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Career Opportunities in Finance

Money and capital markets Investments Financial management

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Responsibilities of the Financial Staff

Forecasting and planning Investment and financing decisions Coordination and control Transactions in the financial markets Managing risk
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Financial Management Issues of the New Millennium Use of computers and electronic transfers of information

The globalization of business

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Percentage of Revenue and Net Income from Overseas Operations for 10 Well-Known Corporations, 1999
Company Percentage of Percentage of Revenue Originated Net Income Overseas Generated Overseas

Chase Manhattan 23.9 Coca-Cola 61.2 Exxon Mobil 71.8 General Electric 31.7 General Motors 26.3 IBM 57.5 McDonalds 61.6 Merck 21.6 Minn. Mining & Mfg. 52.1 Walt Disney 15.4
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21.9 65.1 62.7 22.8 55.3 49.6 60.9 43.4 27.2 16.6
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Alternative Forms of Business Organization Sole proprietorship Partnership Corporation

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Sole Proprietorship

Advantages: Ease of formation Subject to few regulations No corporate income taxes Disadvantages: Limited life Unlimited liability Difficult to raise capital
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Partnership

A partnership has roughly the same advantages and disadvantages as a sole proprietorship.

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Corporation

Advantages: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages: Double taxation Cost of set-up and report filing
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Goals of the Corporation

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?
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Agency Relationships

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
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Shareholders versus Managers 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
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Shareholders versus Creditors 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.
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Does profit maximization equal stock price maximization? No, there is generally a high correlation between EPS, cash flow, and stock price, but todays 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).
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Factors that Affect Stock Price

Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows

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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
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