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
Economics
Accounting
Finance
Financial
Management
Financial
Markets
Investments
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