Finance lies in the middle of accounting and
economics
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Economics asserts that the assets’ value
is based on the future cash flows it will
provide
Accounting measures the likely size of
the cash flows.
Investments
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Chairman of the Board – often is the CEO
COO – firm’s president
CFO – third in ranking
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If publicly owned corporation, CEO and
CFO need to ascertain the accuracy of
Financial Statements (Sarbanes-Oxley
Act)
Three Areas of Finance
Financial
 Corporate Finance
Management
 How much and what
types of assets to
acquire
 How to raise capital
 How to run the firm
to maximize its value
 Applies both to profit
and not-for-profit
organizations
Capital Markets
 Interest rates, stock
and bond prices are
determined
 Studies financial
institutions that
supply capital to a
business and the
organizations that
govern their
operations
Stocks and bonds
Security Analysis –
finding proper values
of individual
securities;
determining the
intrinsic value of
shares
Portfolio Analysis –
how to structure
portfolios/baskets of
stocks and bonds;
diversification will
limit risks
Market Analysis –
stock and bond
markets are either
o Too High
o Too Low
o About Right
Includes Behavioral
Finance – investor
psychology is
examined
These areas are closely interconnected.
Value-Based Management – evaluates
transactions based on their effect on a firm’s
value
Forms of Business Organization

Sole Proprietorship – unincorporated
business owned by one (1) individual
o Easily and Inexpensively formed
o Few government Regulations
o Lower Income Taxes
o Unlimited Liability
o Limited Life (Dependent of
Owner)
o Small Capital
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Partnership – legal arrangement
between two or more people who
decide to do business together
o Easily and Inexpensively Formed
o Taxed on Individual Basis
o Partners have unlimited liability
 Makes it hard to raise
large capital
Corporation – legal entity created by
state; separate and distinct from owners
and managers
o Limited Liability
o Unlimited Life
o Easy to Raise Capital
o Subject to Double Taxation (C
Corporation)
Limited-Liability Companies and
Partnerships – hybrid between
corporation and partnership
Manager’s goal is SHAREHOLDERS’ WEALTH
MAXIMIZATION
A manager should try to maximize the price of
the firm’s stock, subject to ethical and financial
constraints.
Management’s goal should be to make
decisions designed to maximize the stock’s
price.
Management’s goal should be to take actions
designed to maximize the firm’s intrinsic value,
not its current market price; maximize the
average price in the long-run
Trends in the Business
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Sarbanes-Oxley – FS became more
accurate as a result of improved
accounting and auditing procedures
Increased Globalization of Business
Improvements on Information
Technology
Corporate Governance – chain of power
is decentralized from CEO
Business Ethics – company’s attitude and
conduct towards its employees, customers,
community, and stockholders