1-0
WELCOME TO FIN 300!
I’m sure you’re all excited to be here!
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-1
Guest Lecturer:
Alex Wilson, Ph.D.
Prof. Ammermann’s
information follows …
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-2
Peter A. Ammermann, Ph.D.
“Dr. Pete”
CBA 328 Phone: 985-7526
Email = pammerma@csulb.edu
Website =
www.csulb.edu/~pammerma
Office Hours: Immediately after
class and whenever else I happen to
be in (or by appt.)
My background …
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-3
Important Syllabus Info.
 Two tests, plus comprehensive
departmental final
 Homework projects
stock market game
 Weightings:
Tests = total of 50%
• best = 30%
• 2nd best = 20%
Homework and Project = 15%
Final = 35%
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-4
INTRODUCTION
What is finance all about?
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-5
Big Picture: What is Finance??
Ultimately, the gathering and
distribution of cash.
Theoretical basis is Economics - but
we’re more applied.
Our language is Accounting - but
we’re more fun!
Our prey is Strategy & Marketing; our
predator, the Markets
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-6
Fundamentals of Financial
Management
Ninth Edition
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
Requests for permission to make copies of any part of
the work should be mailed to the following address:
Permissions Department, Harcourt, Inc., 6277 Sea
Harbor Drive, Orlando, Florida 32887-6777.
ISBN 0-03-031478-X
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-7
CHAPTER 1
An Overview of Financial Management
Career opportunities
Issues of the new millennium
Forms of business organization
Goals of the corporation
Agency relationships
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-8
Career Opportunities in Finance
Money and capital markets
Investments
Financial management
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1-9
Financial Management
Issues of the new millennium
Use of computers and electronic
transfers of information
The globalization of business
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 10
Percentage of Revenue and Net
Income from Overseas Operations for
10 Well-Known Corporations, 1998
Company
Percentage of
Percentage of
Revenue Originated
Net Income
Overseas
Generated Overseas
3M
Chase Manhattan
Coca-Cola
Exxon
General Electric
General Motors
IBM
McDonald’s
Merck
Walt Disney
Copyright © 2001 by Harcourt, Inc.
51.7
27.8
62.3
80.1
23.9
30.8
56.8
60.8
24.9
16.7
26.9
26.6
64.6
65.1
31.1
68.0
68.9
71.7
27.4
18.9
All rights reserved.
1 - 11
Responsibilities of the Financial Staff
Forecasting and planning
Investment and financing decisions
Coordination and control
Transactions in the financial
markets
Managing risk
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 12
Alternative Forms of Business
Organization
Sole proprietorship
Partnership
Corporation
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 13
Sole Proprietorship
Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 14
Partnership
A partnership has roughly the same
advantages and disadvantages as a
sole proprietorship.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 15
Corporation
Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of set-up and report filing
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 16
Another Possible Disadvantage of
Corporations:
“Agency” Problems
(We’ll get back to this in a minute ...)
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 17
Goals of the Corporation
The primary goal is shareholder
wealth maximization, which translates
to maximizing stock price.
Do firms have any responsibilities
to society at large?
Is stock price maximization good or
bad for society?
Should firms behave ethically?
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 18
And Now Back to Agency Problems ...
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 19
Agency Relationships
An agency relationship exists
whenever a principal hires an agent
to act on their behalf.
Within a corporation, agency
relationships exist between:
Shareholders and managers
Shareholders and creditors
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 20
What is the problem here?
Many times the groups have different
goals and objectives.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 21
Shareholders versus Managers
 Managers are naturally inclined to act in
their own best interests.
e.g., Ross Johnson & RJR-Nabisco
 But the following factors affect managerial
behavior:
Managerial compensation plans
Direct intervention by shareholders
The threat of firing
The threat of takeover
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 22
Shareholders versus Creditors
Shareholders (through managers)
could take actions to maximize
stock price that are detrimental to
creditors.
In the long run, such actions will
raise the cost of debt and
ultimately lower stock price.
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 23
Factors that Affect Stock Price
Projected cash flows to
shareholders
Timing of the cash flow stream
Riskiness of the cash flows
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
1 - 24
Factors that Affect the Level and
Riskiness of Cash Flows
Decisions made by financial
managers:
Investment decisions
Financing decisions (the relative
use of debt financing)
Dividend policy decisions
The external environment
Copyright © 2001 by Harcourt, Inc.
All rights reserved.