1-1

Julian Paja
20th Sep 2023
 1-2
Chapter Outline

1.1 Finance: A Quick Look

1.2 Business Finance and The Financial Manager
1.3 Forms of Business Organization
1.4 The Goal of Financial Management
1.5 The Agency Problem and Control of the Corporation
1.6 Financial Markets and the Corporation
 1-3
Key Concepts and Skills

Have a good understanding of:

 The basic types of financial management decisions and the role of the financial
manager
 The goal of financial management
 The financial implications of the different forms of business organization
 The conflicts of interest that can arise between owners and managers
 1-4
Basic Areas Of Finance

1. Corporate finance = Business Finance

2. Investments
3. Financial institutions
4. International finance
 1-5
Investments

 Work with financial assets such as stocks and bonds

 Value of financial assets, risk versus return, and asset allocation
 Job opportunities
 Stockbroker or financial advisor
 Portfolio manager
 Security analyst
 1-6
Financial Institutions

 Companies that specialize in financial matters

 Banks – commercial and investment, credit unions, savings and loans
 Insurance companies
 Brokerage firms
 Job opportunities
 1-7
International Finance

 An area of specialization within each of the areas discussed so far

 May allow you to work in other countries or at least travel on a regular basis
 Need to be familiar with exchange rates and political risk
 Need to understand the customs of other countries; speaking a foreign language
fluently is also helpful
Basic Areas Of Finance 1-8

INTERNATIONAL

DOMESTIC
Corporate Financial
Investments
Finance Institutions
 1-9
Why Study Finance?

 Marketing
 Budgets, marketing research, marketing financial products
 Accounting
 Dual accounting and finance function, preparation of financial
statements
 Management
 Strategic thinking, job performance, profitability
 Personal finance
 Budgeting, retirement planning, college planning, day-to-day
cash flow issues
 1-
10
Business Finance

 Some important questions that are answered using finance

 What long-term investments should the firm take on?
 Where will we get the long-term financing to pay for the investments?
 How will we manage the everyday financial activities of the firm?
 1-
11
Financial Manager

 Financial managers try to answer some, or all, of

these questions
 The top financial manager within a firm is usually
the Chief Financial Officer (CFO)
 Treasurer– oversees cash management, credit
management, capital expenditures, and financial
planning
 Controller– oversees taxes, cost accounting, financial
accounting, and data processing
 1-
12
Corporate Organization Chart
Figure 1.1
 1-
Financial Management Decisions 13

 Capital budgeting
 What long-term investments or projects should the business take on?
 Capital structure
 How should we pay for our assets?
 Should we use debt or equity?
 Working capital management
 How do we manage the day-to-day finances of the firm?
 1-
14
Forms of Business Organization

Three major forms

Sole proprietorship
Partnership
General
Limited
Corporation
S-Corp
Limited liability company
Return to
Quick Quiz
 1-
15
Sole Proprietorship
Business owned by one person

 Advantages  Disadvantages
 Easiest to start  Limited to life of owner
 Least regulated  Equitycapital limited to
 Single owner keeps all of the owner’s personal wealth
profits  Unlimited liability
 Taxedonce as personal  Difficult to sell ownership
income interest
 1-
16
Partnership
Business owned by two or more persons
Advantages Disadvantages
Two or more owners Unlimited liability

More capital available General partnership
 Limited partnership
Relatively easy to start Partnership dissolves
Income taxed once as when one partner dies or
personal income wishes to sell
Difficult
to transfer
ownership
 1-
17
Corporation
A legal “person” distinct from owners and a
resident of a state
 Advantages  Disadvantages
 Limited liability  Separation
of ownership and
 Unlimited life management (agency problem)
 Separation  Double taxation (income taxed at
of ownership and
management the corporate rate and then
dividends taxed at personal rate,
 Transfer of ownership is easy while dividends paid are not tax
 Easier to raise capital deductible)
 1-
18
International Corporate Forms

 Joint stock companies

 Public limited companies
 Limited liability companies

 All share:
 Public ownership
 Limited liability
 1-
19
Goal Of Financial Management

 What should be the goal of a corporation?

 Maximize profit?
 Minimize costs?
 Maximize market share?
 Maximize the current value per share of the company’s existing
stock
 Maximize the market value of the existing owners’ equity
 1-
20
Goal Of Financial Management

 Does this mean we should do anything and everything to maximize

owner wealth?
 Outsourcing?
 Off-shoring?
 Enron?
 Corporate support of charities?
 1-
Sarbanes-Oxley Act 21
(SarBox, 2002)

 Driven by corporate scandals

 Enron, Tyco, WorldCom, Adelphia
 Intended to strengthen protection against accounting fraud and financial
malpractice
 Compliance very costly
 Firms driven to:
 Go public outside the U.S.
 Go private (“go dark”)
 1-
22
The Agency Problem

 Agency relationship
 Principal hires an agent to represent its interests
 Stockholders (principals) hire managers (agents) to run the company
 Agency problem
 Conflict of interest between principal and agent
 Management goals and agency costs
 1-
23
Do Managers Act in the
Shareholders’ Interests?
 Managerial compensation
 Incentives can be used to align management and stockholder interests
 Incentives need to be carefully structured to insure that they achieve their goal
 Corporate control
 Threat of a takeover may result in better management
 Other stakeholders
 1-
24
Example: Work the Web

 The Internet provides a wealth of information about individual companies

 “finance.yahoo.com” is an excellent site
 Example:
 Southwest Airlines (LUV)
 Harley- Davidson (HOG)
 Starwood Hotels & Resorts (HOT)
 American Express (AXP)
 1-
Cash Flows Between the Firm and the Financial Markets 25
Figure 1.2
 1-
26
Financial Markets

 Cash flows to the firm

 Primary vs. secondary markets
 Dealer vs. auction markets
 Listed vs. over-the-counter securities
 NYSE

 NASDAQ
 1-
27
Quick Quiz

 What are the four basic areas of finance? (Slide 1.4)

 What are the three types of financial management decisions, and what
questions are they designed to answer? (Slide 1.13)
 What are the three major forms of business organization? (Slide 1.14)
 What is the goal of financial management? (Slide 1.19)
 What are agency problems, and why do they exist within a
corporation? (Slide 1.22)
Chapter 1

END