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Chapter 1
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The Role of the Financial Manager Forms of Business Organization Managing the Financial Function
goods and services produced by its productive assets and human capital.
The firm can pay the remaining cash, called
residual cash flows, to the owners as a cash dividend, or reinvest the cash in the business.
Which productive assets should the firm buy? finance manager invest in a capital project only if benefits>cost (1.2 table)
The financing decision (capital structure
decision ) How should the firm finance or pay for assets? Decision related to proportion of equity & debt. 7
Exhibit 1.2: How Financial Managers Decisions Affect the Balance Sheet
Capital Budgeting Decisions Return Market Value of the Firm Dividend Decisions Risk Working Capital Decisions
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income.
A sole has unlimited liability for all business
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its owners.
The owners of a corporation are its
stockholders, or shareholders.
A major advantage of the corporate form of business is that stockholders have limited liability
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number of investors
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1)Sole Proprietorship
One owner Very simple Unlimited liability The firm has no separate status from a legal and tax
Two or more owners Fairly simple Unlimited or limited liability The firm has a separate status
Many owners
Somewhat complex Limited liability
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Go to Exhibit 1.3
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statements, oversees the firms cost accounting systems, prepares taxes, and works closely with the firms external auditors.
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engagement letter. The external auditor cannot be fired or terminated without the audit committees approval.
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a decision that increases profits under one set of accounting rules can reduce it under another.
Accounting profits are not
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firm is spread over huge number of shareholders and the firms owners may effectively have little control over management management may make decisions that benefit their self-interest rather than those of the stockholders.
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one party, called the principal, hires another party, called the agent
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managers control the money and have the opportunity to use it for their own benefit.
Agency Costs The costs of the conflict of interest between the firms owners and its management.
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not aligned, then eventually the firm will under perform relative to its true potential
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Establish Internal Accounting Controls Establish Ethics Program Expand Audit Committees Oversight Powers
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in an economy
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institutional gain and the obligation to serve the interest of another party.
Information Asymmetry one party in a transaction has
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extremely high.
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