An Overview of Managerial Finance
What is finance, and why should you
understand basic financial concepts?
What are the different forms of
business organization?
What goals should firms pursue?
What is the role of ethics in successful
businesses?
How do foreign firms differ from U.S.
firms?
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What is Finance?
Finance deals with decisions concerning cash
inflows and cash outflows.
Emphasis is on cash flows rather than income
because most liabilities—that is, debts—must be
paid with cash.
Everything else being equal:
 More value is preferred to less.
 The sooner cash is received the more value it has.
 Less risky assets are more valuable than riskier assets.
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Importance of Managerial Finance in
Nonfinance Areas
Most business decisions cannot be made
without considering the impact on the
financial well-being of the firm.
Must determine whether the funds needed
to implement decisions are available.
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General Areas of Finance
Financial Markets and Institutions
Investments
Financial Services
Managerial Finance
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General Areas of Finance
Financial Markets and Institutions
 Relates to the financial markets and the
participants in these markets
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General Areas of Finance
Investments
 Involves evaluating financial assets to
determine which investments to include in
a portfolio of financial assets.
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General Areas of Finance
Financial Services
 Refers to functions provided by
organizations in the finance industry,
including services that help individuals (and
companies) determine how to invest
money to achieve such goals as retirement
and financial stability.
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General Areas of Finance
Managerial Finance
 Involves decisions regarding investments in
real assets, such as plant and equipment,
(investing decisions) and how such
investments should be financed (financing
decisions).
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Alternative Forms of Business
Organization
Proprietorship
Partnership
Corporation
Hybrid Forms of Business
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Proprietorship—70%-75%
Advantages:
 easy and relatively inexpensive to form
 affected by few regulations
 business is taxed as an individual
Disadvantages
 unlimited personal liability
 firm’s life is limited
 ownership transfer can be difficult
 firm’s credit and its ability to raise funds
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Partnership—about 10%
Advantages:
 easy and relatively inexpensive to form
 affected by few regulations
 business is taxed as an individual
Disadvantages
 unlimited personal liability
 firm’s life is limited
 ownership transfer can be difficult
 firm’s credit and its ability to raise funds—better
than for a proprietorship
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Corporation—15%-20%
Advantages:
 limited liability
 unlimited life
 easy transfer of ownership
 ease of raising capital
Disadvantages:
 cost of set-up and filing financial reports
 double taxation
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Hybrid Forms of Business
Limited Liability Partnership (LLP)
 some partners have limited liability
 must be one general partner
Limited Liability Company (LLC)
 taxed like a partnership, but owners have limited
liability
 flexible ownership structure
S Corporation
 fewer than 100 stockholders
 taxed like a partnership
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Goals of the Corporation
Maximize wealth
 Should be the primary goal of the financial
manager.
Social Responsibility
 Firms should be socially responsible at the same
time they earn “normal” profits.
Wealth Maximization & Social Responsibility
 Actions that maximize the value of the firm also
are beneficial to society; wealth maximization
improves the standard of living.
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Agency Relationships
An agency relationship exists when owners do
not manage the firm’s day-to-day operations.
An agency “problem” exists if managers
attempt to satisfy interests that differ from the
best interests of the firm’s owners.
Two important agency relationships that exist
are between managers and stockholders and
stockholders and creditors.
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Stockholders versus Managers
An agency problem is possible if owners do
not run the company.
An agency problem can be mitigated by the
following means:
 threat of firing
 takeover threat
 reward managers for acting in the best interests
of owners
 make managers owners
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Stockholders versus Creditors
If stockholders approve actions that harm
the positions of the firm’s creditors, it is
likely that the firm will find it difficult to
borrow funds in the future.
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Business Ethics
Webster: “A standard of conduct and
moral behavior.”
Business Ethics: A company’s attitude
and conduct toward its employees,
customers, community, and investors
(debt holders and stockholders)
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Corporate Governance
The “set of rules” that a firm follows
when conducting business
As a result of the Sarbanes-Oxley Act
of 2002, firms are revising their
corporate governance policies
Good corporate governance generates
higher returns to stockholders
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Forms of Business in
Other Countries (Foreign Companies)
Most businesses that are based outside the
United States are “closed” organizations in
the sense that they have more concentrated
ownership—that is, fewer owners.
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Multinational Corporations
Firms go “international” to
seek new markets
seek raw materials
seek new technology
seek production efficiency
avoid political and regulatory hurdles
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Factors that Distinguish Domestic
Firms from Multinational Firms
different currency denominations
economic and legal ramifications
language differences
cultural differences
government involvement
political risk
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An Overview of Managerial Finance
What is finance?
Finance deals with decisions about money
What are the forms of business organization?
Proprietorship, partnership, corporation
What goals should firms pursue?
Maximize stockholder’s wealth
What is the role of ethics in business?
“Ethical firms” survive; “non-ethical firms” do not
How do foreign firms differ from U.S. firms?
Non-US firms have more concentrated ownership
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