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Chapter 01

The document introduces financial management, discussing various forms of business organizations, including proprietorships, partnerships, and corporations, along with their advantages and disadvantages. It emphasizes the primary financial goal of corporations as maximizing shareholder wealth and stock prices while addressing ethical responsibilities and conflicts between managers and shareholders. Additionally, it highlights recent trends in business ethics, technology, and globalization that impact financial management.

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Teacher9
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8 views11 pages

Chapter 01

The document introduces financial management, discussing various forms of business organizations, including proprietorships, partnerships, and corporations, along with their advantages and disadvantages. It emphasizes the primary financial goal of corporations as maximizing shareholder wealth and stock prices while addressing ethical responsibilities and conflicts between managers and shareholders. Additionally, it highlights recent trends in business ethics, technology, and globalization that impact financial management.

Uploaded by

Teacher9
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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CHAPTER 1

Introduction to Financial
Management
 Forms of Businesses
 Goals of the Corporation
 Stock Prices and Intrinsic Value
 Some Recent Trends
 Conflicts Between Managers
and Shareholders 1-1
Alternative Forms of
Business Organization
 Proprietorship
 Partnership
 Corporation

1-2
Proprietorships &
Partnerships
 Advantages
 Ease of formation
 Subject to few regulations
 No corporate income taxes
 Disadvantages
 Difficult to raise capital
 Unlimited liability
 Limited life
1-3
Corporation
 Advantages
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
 Disadvantages
 Double taxation
 Cost of set-up and report filing

1-4
Financial Goals of the
Corporation
 The primary financial 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?
1-5
Factors that affect stock
price
 Projected cash
flows to
shareholders
 Timing of the
cash flow
stream
 Riskiness of the
cash flows
1-6
Stock Prices and Intrinsic
Value
 In equilibrium, a stock’s price should
equal its “true” or intrinsic value.
 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.
1-7
Determinants of Intrinsic
Value and Stock Prices
(Figure 1-1)

1-8
Some Important Trends
 Recent corporate scandals have
reinforced the importance of business
ethics, and have spurred additional
regulations and corporate oversight.
 The effects of changing information
technology have had a profound effect
on all aspects of business finance.
 The continued globalization of
business.

1-9
Conflicts Between Managers
and Stockholders
 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 affect managerial
behavior:
 Managerial compensation plans
 Direct intervention by shareholders
 The threat of firing
 The threat of takeover
1-10
Responsibility of the Financial
Staff
 Maximize stock value by:
 Forecasting and planning
 Investment and financing decisions
 Coordination and control
 Transactions in the financial
markets
 Managing risk

1-11

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