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Chapter 1

This document provides an overview of financial management. It defines finance and outlines its three main areas: financial management, capital markets, and investments. It describes the typical structure of a company's financial organization and different forms of business organization such as sole proprietorships, partnerships, and corporations. It discusses concepts such as stock price versus intrinsic value, stockholder-manager conflicts, stockholder-debtholder conflicts, and balancing shareholder interests with societal interests. The primary goal of financial management is maximizing shareholder wealth through stock price appreciation while recognizing the importance of social responsibility.

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Albert Bugas
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78 views11 pages

Chapter 1

This document provides an overview of financial management. It defines finance and outlines its three main areas: financial management, capital markets, and investments. It describes the typical structure of a company's financial organization and different forms of business organization such as sole proprietorships, partnerships, and corporations. It discusses concepts such as stock price versus intrinsic value, stockholder-manager conflicts, stockholder-debtholder conflicts, and balancing shareholder interests with societal interests. The primary goal of financial management is maximizing shareholder wealth through stock price appreciation while recognizing the importance of social responsibility.

Uploaded by

Albert Bugas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter One

An Overview of Financial Management


WHAT IS FINANCE?

• Finance is de ned as the system that includes the circulation of money, the
granting of credit, the making of investments, and the provision of banking
facilities
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Three Areas of Finance

1. Financial Management

2. Capital Markets

3. Investments
FINANCE WITHIN AN ORGANIZATION
Board of Directors

Chief Executive Officer (CEO)

Chief Operating Officer (COO) Chief Financial Officer (CFO)

Marketing, Production, Human Resources, and Other Operating Departments Accounting, Treasury, Credit, Legal, Capital Budgeting, and Investor Relations
FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship

2. Partnership

3. Corporation
Proprietorships and Partnerships
ADVANTAGES

• Ease of formation

• Subject to few regulations

• No corporate income taxes

DISADVANTAGES

• Di cult to raise capital

• Unlimited liability

• Limited lifE
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CORPORATIONS
Advantages Disadvantages

Unlimited life Double taxation

Easy transfer of ownership Cost of setup and report filing

Limited liability

Ease of raising capital


STOCK PRICE vs 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.
Stockholder-Manager Conflicts

• 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 a ect managerial behavior:

A. Managerial compensation packages

B. Direct intervention by shareholders

C. The threat of ring

D. The threat of takeover


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Stockholder-Debtholder Conflicts

• Stockholders are more likely to prefer riskier projects, because they receive
more of the upside if the project succeeds. By contrast, bondholders receive
xed payments and 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.
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BALANCING SHAREHOLDER INTERESTS AND SOCIETY INTERESTS

• The primary nancial goal of management is shareholder wealth maximization,


which translates to maximizing stock price.

• Value of any asset is present value of cash ow stream to owners.

• Most signi cant decisions are evaluated in terms of their nancial


consequences.

• Stock prices change over time as conditions change and as investors obtain
new information about a company’s prospects.

• Managers recognize that being socially responsible is not inconsistent with


maximizing shareholder value.
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