Financial Management: 2002, Prentice Hall, Inc

This document provides an introduction to financial management. It defines finance as focusing on decision making to create economic value and wealth. The key decisions discussed are related to introducing new products, investing assets, replacing assets, borrowing, and issuing stocks or bonds. The goals of a firm are discussed as either profit maximization, shareholder wealth maximization, or maximizing firm value. Legal forms of business include sole proprietorships, partnerships, and corporations. Corporations interact with investors through primary and secondary markets. The primary market involves new stock issues, while the secondary market is where existing stocks are traded. Financial management axioms conclude the document.

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Financial Management: 2002, Prentice Hall, Inc

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Muhammad Zeeshan Khan

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Ch.

1 - An Introduction to
Financial Management

 2002, Prentice Hall, Inc.

What is Finance

• Maintenance & creation of economic value

or wealth.
Thus we will focuses on decision making with
an eye towards creating wealth.
• Financial decisions- when to introduce a
new product, invest in new assets, replace
the existing assets, when to borrow from
bank , when to issue stocks or bonds.
• Decision making techniques & the logic
behind those techniques.
Goal of the Firm

1) Profit Maximization?
Efficient use of capital resources
R&D Expenditures
Cutting down the routine maintenance
Effect in short run = Profit Max
Long run = not in the interest of the firm
this goal ignores:
The firm must deal every day with 2 major factors
a) TIMING of Returns
(Time Value of Money - Ch. 5)
b) UNCERTAINTY of Returns
(Risk - Ch. 6)
Goal of the Firm

2) Shareholder Wealth
Maximization?
this is the same as:
a) Maximizing Firm Value
b) Maximizing Stock Price
Legal Forms of Business
1) Sole Proprietorship
• A business owned by a single individual.
• Owner maintains title to the firm’s assets.
• Owner has unlimited liability.

2) Partnership
• Similar to a sole proprietorship, except
that there are two or more owners.
Legal Forms of Business
2a) General Partnership
• All partners have unlimited liability.

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.
Legal Forms of Business
3) Corporation
• A business entity that legally functions
separate and apart from its owners.
• Owners’ liability is limited to the amount
of their investment in the firm.
• Owners hold common stock certificates,
and ownership can be transferred by
selling the certificates.
The Corporation and Financial
Markets
The Corporation and Financial
Markets

Corporation
The Corporation and Financial
Markets

Corporation Investors
The Corporation and Financial
Markets

Corporation Investors