Chapter 1
Finance and Business
Areas of Finance
• Business Finance – Decision making within
a business setting
• Investments – Allocation of money to earn
future return
• Markets and Institutions – System through
which funds (money) flow to productive
uses
Economic/Finance
Economics - Making decisions on how to
best allocate scare resources (land, labor,
capital) to meet the needs of society
Finance – Making decisions on how to best
allocate financial resources (money)
Goal of Individuals
Maximize their utility (satisfaction)
Allocate (spend vs. invest) financial
resources to maximize satisfaction
Objective of Finance
• Maximize wealth of owners
• Maximize value of the firm
• Maximize price of firm’s stock
Maximizing wealth of owners who can then
maximize their personal satisfaction
Managers cannot decide for individual owners how
to best maximize their personal satisfaction
Shareholders vs. Stakeholders
There are many advocates for looking after the
welfare of stakeholders over shareholders (a
stakeholder is anyone having a stake in the
company – owners, employees, suppliers, the
community)
How do we balance competing stakeholders
wishes
Shareholders wealth cannot be maximized in the
long run at the expense of other stakeholders
Agency Problem
Agent (manager) vs. Principal (owner)
Assuring managers don’t take care of
there own interests over other
stakeholders
Importance of Cash Flows
• When can “less” be worth more than
“more”
• Time Value of Money
• Risk
Finance Functions (Decisions)
• Investment Decision
• Financing Decision
• Working Capital
How to Make Decisions
• Determine how decision will effect cash
flows of the firm
• Adjust change in cash flows for time value
of money
• Evaluate the change in cash flows for risk
What Defines Finance?
• Time Value of Money
• Risk
Financial Statements
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Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Changes in Retained
Earnings
Forms of Business
• Proprietorship – Individual
• Partnership
• Corporation
Ethics and Global Economy
• Making ethical decision
• Dealing with global economy