Introduction to Financial
Management
Chapter 1
1.0
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Chapter Outline
1.
2.
3.
4.
5.
6.
Basic Areas of Finance
Financial Management Decisions
Forms of Organization
Goal of Financial Management
The Agency Problem
Financial Markets
1.1
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1.Basic Areas Of Finance
 Corporate
finance (Business finance)
 Investments
 Financial institutions
 International finance
1.2
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Corporate Finance
The study of financial decision making in business
organizations.
 The study of basic techniques a financial manager should
have.

1.3
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2.Financial Management Decisions
 Capital
budgeting
What long-term investments or projects should we take on?
 About size, timing and riskiness of future cash flows.

 Capital
structure
How should we raise fund? Should we use debt or equity?
 Concerns about the mix of sources of funds, such as debt
(borrowing) and equity (ownership interest), used.

 Working
capital management
How do we manage the day-to-day finances of the firm?
 Concerns about management of short-term assets and
liabilities

1.4
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3. Forms of Organization
 Three
major forms in the united states
Sole proprietorship: A business owned by a single individual.
 Partnership: A business formed by two or more individuals or
entities.

General: unlimited liability for all partners
 Limited: general partners vs. limited partners


Corporation: A business created as a distinct legal entity
owned by one or more individuals or entities.
S-Corp: a form of small corporation taxed like a partnership
thus avoids double taxation
 Limited liability company: operate and taxed like a partnership
but retain limited liability for owners

1.5
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Corporation

Advantages
 Limited liability
 Unlimited life
 Separation of ownership and
management
 Transfer of ownership is
easy
 Easier to raise capital

Disadvantages
 Separation of ownership and
management
 Double taxation (income
taxed at the corporate rate
and then dividends taxed at
personal rate)
1.6
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4.Goal Of Financial Management
 What
should be the goal of a corporation?
Maximize profit?
 Minimize costs?
 Maximize market share?
 Maximize the current value of the company’s stock?

1.7
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5.The Agency Problem
 Agency
relationship
Principal hires an agent to represent their interest
 Stockholders (principals) hire managers (agents) to run the
company

 Agency

problem
Conflict of interest between principal and agent
 Management

goals and agency costs
Agency costs: the costs of the conflict of interest between
stockholders (principals) and management (agents).
1.8
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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
1.9
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6.Financial Markets
 Cash
flows to the firm (Figure 1.2)
 Primary markets: original sale by governments and
corporations

Public offerings vs. private placement
 Secondary
markets: securities bought and sold after the
original sale
 NYSE (New York Stock Exchange) vs. NASDAQ
(National Association of Security Dealers Automated
Quotations system)
Auction vs. dealer markets
 Listed (stocks that trade on an exchange are said to be listed)
vs. over the counter securities

1.10
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Figure 1.2
1.11
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Review Questions
1.
2.
3.
4.
5.
6.
What are the four basic areas of finance?
What are the three types of financial management
decisions and what questions are they designed to answer?
What are the three major forms of business organization?
What are their advantages and disadvantages respectively?
What is the goal of financial management?
What are agency problems and why do they exist within a
corporation?
What is primary/secondary market? What is an
auction/dealer market? What types of market are NYSE
and NASDAQ respectively?
1.12
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