Chapter 1 an overview of financial management

THE GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT (Chapter 1)

• Field of Finance: An Overview
• Goal of the Firm
• Agency Problem
• Business Ethics
• Forms of Business Organization
• Globalization
• Computerization

Field of Finance: An Overview

Financial Management (Insiders)

• Investment Decisions - Assets
• Using Funds
• Financing Decisions - Debt and Equity
• Acquiring Funds
• MGMT 133, MGMT 134, MGMT 174
• MGMT 133 is oriented towards all business majors (not just finance majors)

Investments (Outsiders)

• Security Analysis
• Portfolio Management
• MGMT 135
• MGMT 136

Financial Markets

• Money and Capital Markets
• Primary and Secondary Markets
• Financial Institutions: Banks, Insurance Companies, Credit Unions, Mutual Funds, Etc..
• Federal Reserve: Interest Rates, Regulation
• MGMT 137, ECON 135

Goal of the Firm

• Wealth Maximization
• Maximize the wealth of the firm’s existing common stockholders
• Wealth Defined
• Market Value of the firm’s common stock
• (Price per share)(number of shares)

Goal of the Firm (Continued)

• Factors Affecting Price Per Share
• Earnings per share (EPS)
• Price/Earnings Ratio
• Timing of EPS
• Risk
• Problem With Earnings Maximization
• Ignores many of the important variables that impact on the stockholders’ well being (i.e.., wealth)

Agency Problem

• Stockholders Versus Managers
• Managers, in light of their self interest, may at times make decisions that are not oriented towards maximizing stockholder wealth. This does not, however, invalidate the goal itself.
• Incentives for management to act in the stockholders’ best interest
• Threat of being fired - PERS is quite active
• Hostile takeover if stock price is too low
• Performance based salaries

Business Ethics

• Ethics Defined
• Standards of conduct and moral judgment
• Unethical conduct may be obvious at times.
• Insider Trading
• Ethical dilemmas, however, can also exist.
• Profits and ethics sometimes conflict
• Often there is no clear-cut right or wrong answer

Forms of Business Organization

• Sole Proprietorship
• About 75% of all firms
• Partnership
• Corporation
• About 90% of all sales dollars

Sole Proprietorship

• A single owner
• Unlimited liability
• Taxed at personal income tax rates
• Easiest and least expensive to establish
• Market value of firm difficult to estimate
• Difficult to raise equity capital

Partnership

• Two or more owners
• Unlimited liability
• Taxed at personal income tax rates
• Not too costly to establish
• Market value of firm difficult to estimate
• Difficult to raise equity capital
• Easier to raise capital compared to a sole proprietorship, however.

Corporation (Publicly Traded)

• Unlimited life
• Legal entity
• Easy to transfer ownership
• Limited liability of stockholders
• Double taxation
• Corporate earnings taxed
• Stockholders’ dividends taxed
• Most attractive form for raising capital
• Market Value easy to determine

Hybrid Forms of Organization

• Limited partnership
• Liability limited to investment
• Subchapter S Corporation
• Shareholders enjoy limited liability, but income is taxed at personal income rates.

Globalization

• Financial managers must have a multinational perspective regarding many decisions
• Various international aspects of financial management will be introduced throughout the semester

Technology

• Strong computer skills are essential
• Internet and World Wide Web
• Electronic Commerce