Professional Documents
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INTRODUCTION TO FINANCIAL
MANAGEMENT
- CHAPTER 1 &M:
6 Finance 3rd Edition
(P.129-P.141)
Cornett, Adair, and Nofsinger
What is Finance?
Finance applies specific value to
things we owned,
services we used,
decisions we made.
Financial management
organizations approach to valuation of
Economic Participants
Type 1 Participants
Do not lend or spend in business context.
No direct role in financial markets.
Indirect role to provide labor and consume
products.
Economic Participants
Type 4 Participants
Use financial tools to
markets.
Economic Participants
Types 2 and 3 Participants
Use financial institutions and financial markets
Economic Participants
Two dimensions
Participants with extra investment money.
Participants with economically viable ideas.
ongoing operations)
Taxes (funds that go to the Government)
Sub-areas of Finance
Investments
Involve methods and techniques for making
Sub-areas of Finance
Financial Management
Decisions about acquiring and using cash.
Examples include :
(Financing decisions).
Tax decisions.
Projects to fund (Capital Budgeting decisions
to be discussed in the future).
Sub-areas of Finance
Financial Institutions and Markets
Facilitate flow of capital between investors and
companies.
International Finance
Finance theory used in global business
environment.
Involves foreign exchange risk and political risk.
and size.
Financial Asset
Ownership in cash flow represented by
Real Markets
Places / processes that facilitate trading of real
assets.
Financial Management
Combines historical figures and current
CFO
Controller
Oversees accounting function
Controller
Treasurer
Treasurer
Responsible for managing cash, credit,
Business Organizations
Single Owners, Partners, and
Sole Proprietorships
Not legally separate from the owner.
Advantages
Easy to start.
Light regulatory and paperwork burden.
Single taxation at the personal tax rate.
Disadvantages
Unlimited liability.
Limited access to capital.
General Partnerships
Partners own the business together.
Advantages
Public Corporations
Legally independent entity entirely
Hybrid Organizations
Combine attributes of several forms.
Advantages
Offer single taxation and limited liability to all
owners. Examples :
S Corporations
Limited Liability Partnerships (LLPs)
Limited Liability Companies (LLCs)
Firm Goals
Owners seek to maximize shareholders
Corporate Goals
Maximize Value of Owners Equity
Increase current value per share (stock price) of
existing shares.
Common methods :
Maximize net income or profit.
Minimize costs.
Maximize market share.
Agency Theory
Problems arise when principal
Agency Theory
Three approaches to minimizing this
conflict of interest :
Ignore if effect is minimal.
Use accountants, debt holders to monitor
Corporate Governance
The process of monitoring managers
Corporate Governance
Inside Monitors
Board of Directors
Hires the CEO
Evaluates management
Designs compensation plans
Corporate Governance
Outside Monitors
Auditors
Analysts
Banks
Credit rating agencies (e.g. Standard &
Poors, Moodys, Fitch Ratings)
Ethics
Financial professionals manage other
relationship
Stealing from firms = stealing from shareholders
Financial Markets
Manage flow of funds
Two major market dimensions
Primary Markets
Used by corporations and
governments
Used to issue new financial
instruments such as initial public
offerings (IPOs)
Stocks
Bonds
Secondary Markets
Benefit investors and issuers
Securities traded after issue between buyers
and sellers
Provide liquidity and diversification benefits for
investors
Security valuation information for issuers
Other Markets
Foreign Exchange Markets
Trade currency for immediate delivery (spot) or
Other Markets
Derivatives
Highly leveraged financial securities linked to
underlying security
Potentially high-risk
Used for hedging and speculating
Financial Institutions
Commercial Banks
Thrifts i.e. depository institutions including
Financial Institutions
Perform vital economic functions
Monitoring costs: lower the costs of fund suppliers
End of Lecture 1