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Act1108 - Intro To Finman

The document introduces several key concepts in financial management. It discusses the three basic areas of finance - financial management, financial markets, and investments. It outlines the three types of financial management decisions - capital budgeting, capital structure, and working capital management - and the questions each aims to answer. The goal of financial management is to maximize the current value of the company's stock. The three major forms of business organization are sole proprietorships, partnerships, and corporations. Agency problems exist within corporations due to conflicts of interest between stockholders and managers.

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Anna Williams
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69 views14 pages

Act1108 - Intro To Finman

The document introduces several key concepts in financial management. It discusses the three basic areas of finance - financial management, financial markets, and investments. It outlines the three types of financial management decisions - capital budgeting, capital structure, and working capital management - and the questions each aims to answer. The goal of financial management is to maximize the current value of the company's stock. The three major forms of business organization are sole proprietorships, partnerships, and corporations. Agency problems exist within corporations due to conflicts of interest between stockholders and managers.

Uploaded by

Anna Williams
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
You are on page 1/ 14

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I. Introduction to
Financial
Management
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Objectives:
• What are the three basic areas of finance?
• What are the three types of financial
management decisions, and what questions
are they designed to answer?
• What is the goal of financial management?
• What are the three major forms of business
organization?
• What are agency problems, and why do they
exist within a corporation?

1
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Basic Areas Of Finance


• Financial Management (Corporate Finance)
• Financial Markets
• Investments

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Financial Management
Decisions
• Capital budgeting (Investment)
– What long-term investments or projects
should the business take on?
• Capital structure (Financing)
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management (Working
Capital)
– How do we manage the day-to-day
finances of the firm?
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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

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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?

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Forms of Business Organization


• Three major forms in the United States
– Sole proprietorship
– Partnership
• General
• Limited
– Corporation

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Sole Proprietorship

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

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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

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Corporation
• Advantages • Disadvantages
– Limited liability – Separation of
– Unlimited life ownership and
– Separation of management (agency
ownership and problem)
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)

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1-10

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

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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

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Figure 1.2

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Quick Quiz
• What are the three basic areas of finance?
• What are the three types of financial
management decisions, and what questions
are they designed to answer?
• What is the goal of financial management?
• What are the three major forms of business
organization?
• What are agency problems, and why do they
exist within a corporation?

13

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