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    Lesson 1 BM3

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    Andrea Wagan
    zXzX

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    Lesson 1 BM3

    Uploaded by

    Andrea Wagan
    18 views22 pages
    zXzX

    Original Title

    Lesson_1_BM3 (1)

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    zXzX

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    18 views22 pages

    Lesson 1 BM3

    Uploaded by

    Andrea Wagan
    zXzX

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 22

    Lesson 1

    Introduction to
    Financial
    Management

    1
    McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
    1-2 1-2

    Key Concepts and Skills


    • Know the basic types of financial
    management decisions and the role of
    the financial manager
    • Know the financial implications of the
    different forms of business organization
    • Know the goal of financial management
    • Understand the conflicts of interest that
    can arise between owners and managers

    2
    1-3 1-3

    Chapter Outline
    • Finance: A Quick Look
    • Business Finance and The Financial
    Manager
    • Forms of Business Organization
    • The Goal of Financial Management
    • The Agency Problem and Control of the
    Corporation
    • Financial Markets and the Corporation
    3
    1-4 1-4

    Basic Areas Of Finance


    • Corporate finance
    • Investments
    • Financial institutions
    • International finance

    4
    1-5 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

    5
    1-6 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

    6
    1-7 1-7

    International Finance
    • This is an area of specialization within each of
    the areas discussed so far
    • It 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

    7
    1-8 1-8

    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
    8
    1-9 1-9

    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?

    9
    1-10
    1-10

    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

    10
    1-11
    1-11
    Financial Management
    Decisions
    • 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?

    11
    1-12
    1-12

    Forms of Business Organization


    • Three major forms in the United States
    – Sole proprietorship
    – Partnership
    • General
    • Limited
    – Corporation
    • S-Corp
    • Limited liability company

    12
    1-13
    1-13

    Sole Proprietorship
    • Advantages • Disadvantages
    – Easiest to start – Limited to life of owner
    – Least regulated – Equity capital limited to
    – Single owner keeps all owner’s personal
    of the profits wealth
    – Taxed once as – Unlimited liability
    personal income – Difficult to sell
    ownership interest

    13
    1-14
    1-14

    Partnership
    • 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
    personal income or wishes to sell
    – Difficult to transfer
    ownership

    14
    1-15
    1-15

    Corporation
    • Advantages • Disadvantages
    – Limited liability – Separation of
    – Unlimited life ownership and
    – Separation of management (agency
    problem)
    ownership and
    management – Double taxation
    – Transfer of ownership (income taxed at the
    is easy corporate rate and
    then dividends taxed
    – Easier to raise capital at personal rate, while
    dividends paid are not
    tax deductible)

    15
    1-16
    1-16

    Goal Of Financial Management


    • What should be the goal of a corporation?
    – Maximize profit?
    – Minimize costs?
    – Maximize market share?
    – Maximize the current value of the company’s
    stock?
    • Does this mean we should do anything
    and everything to maximize owner wealth?
    • Sarbanes-Oxley Act
    16
    1-17
    1-17

    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

    17
    1-18
    1-18

    Managing Managers
    • Managerial compensation
    – Incentives can be used to align management and
    stockholder interests
    – The incentives need to be structured carefully to
    make sure that they achieve their goal
    • Corporate control
    – The threat of a takeover may result in better
    management
    • Other stakeholders

    18
    1-19
    1-19

    Example: Work the Web


    • The Internet provides a wealth of
    information about individual companies
    • One excellent site is finance.yahoo.com
    • Click on the Web surfer to go to the site,
    choose a company and see what
    information you can find!

    19
    1-20
    1-20

    Figure 1.2

    20
    1-21
    1-21

    Financial Markets
    • Cash flows to the firm
    • Primary vs. secondary markets
    – Dealer vs. auction markets
    – Listed vs. over-the-counter securities
    • NYSE
    • NASDAQ

    21
    1-22
    1-22

    Quick Quiz
    • What are the four basic areas of finance?
    • What are the three types of financial
    management decisions, and what questions are
    they designed to answer?
    • What are the three major forms of business
    organization?
    • What is the goal of financial management?
    • What are agency problems, and why do they
    exist within a corporation?
    • https://www.youtube.com/watch?v=0RHqiYBrzWg
    • https://corporatefinanceinstitute.com/resources/knowledge/tests/finance-test/

    22

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