Chapter 1
Chapter 1
Introduction to
Financial
Management
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McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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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
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Corporate Finance
• Corporate Finance is the division of the company that
deals with financial and investment decisions.
• Corporate finance is primarily concerned with
maximizing shareholder value through long-term and
short term financial planning and the implementation
of various strategies.
• Corporate finance activities range from capital
investment decisions to investment banking.
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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
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Financial Institutions
• Companies that specialize in financial
matters
– Banks – commercial and investment, credit
unions, savings and loans
– Insurance companies
– Brokerage firms
• Job opportunities
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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
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International Finance
• Sometimes known as international macroeconomics
– is a section of financial economics that deals with
the monetary interactions that occur between two or
more countries.
• This section is concerned with topics that include
foreign direct investments and currency exchange
rates.
• It also involves issues pertaining to financial
management, such as political and foreign exchange
risk that comes with managing multinational
corporations.
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Multinational Corporation
• A multinational corporation (MNC) has facilities and
other assets in at least one country other than its
home country. Such companies have offices and/or
factories in different countries and usually have a
centralized head office where they coordinate global
management.
• Multinational corporations are sometimes referred to
as transnational, international or stateless
corporations.
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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?
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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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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?
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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 all owner’s personal
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
– Relatively easy to • Limited partnership
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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
– Easier to raise capital then dividends taxed
at personal rate, while
dividends paid are not
tax deductible)
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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
• Other stakeholders
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Figure 1.2
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Financial Markets
• Cash flows to the firm
• Primary vs. secondary markets
– Dealer vs. auction markets
– Listed vs. over-the-counter securities
• NYSE
• NASDAQ
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