---FINANCE--- CHAPTER 1

1. Chapter 1
Introduction to
Managerial Finance
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2. Learning Outcomes
Chapter 1
 Explain what finance entails and why everyone should have an
understanding of basic financial concepts
 Identify different forms of business organization as well as the
advantages and disadvantages of each.
 Identify (1) major goals that firms pursue and (2) what a firm’s
primary goal should be.
 Explain the role that ethics and good governance play in
successful businesses.
 Describe how foreign firms differ from U.S. firms and identify
factors that affect financial decisions in multinational firms.
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3. What is Finance?
 Finance is concerned with decisions about
money (Cash Flows)
 Finance decisions deal with how money is
raised and used
 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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4. General Areas of Finance
 Financial Markets and Institutions
 Investments
 Financial Services
 Managerial Finance
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5. Finance in the Organizational Structure of
the Firm
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Board of Directors
President (CEO)
Treasurer Controller
Credit
Manager
Inventory
Manager
Director of
Capital
Budgeting
Financial
and Cost
Accounting
Tax
Department
Vice-President:
Finance (CFO)
Vice-President:
Sales
Vice-President:
Information Systems (CIO)
Vice-President:
Operations (COO)

6. Alternative Forms of
Business Organization
 Proprietorship
 Partnership
 Corporation
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7. Proprietorship
 Advantages:
 Ease of formation
 Subject to few government regulations
 No corporate income taxes
 Limitations:
 Unlimited personal liability
 Limited life
 Transferring ownership is difficult
 Difficult to raise capital
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8. Partnership
 Like a proprietorship, except two or more
owners
 A partnership has roughly the same
advantages and limitations as a
proprietorship
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9. Corporation
 Advantages:
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
 Disadvantages:
 Cost of set-up and report filing
 Double taxation
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10. Hybrid Forms of Business
 Limited Liability Partnership (LLP)
 Limited Liability Company (LLC)
 S Corporation
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11. Business Organized as a Corporation:
Value Maximized
 Limited liability reduces risk increasing market
value
 Ease of raising capital allows taking
advantage of growth opportunities
 Ownership can be easily transferred thus
investors would be willing to pay more for a
corporation
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12. Goals of the Corporation
 Primary goal: stockholder wealth maximization
— translates to maximizing stock price.
 Managerial incentives
 Social responsibility
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13. Managerial Actions to
Maximize Stockholder Wealth
 Capital Structure Decisions
 Capital Budgeting Decisions
 Dividend Policy Decisions
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14. Value of the Firm
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15. Factors Influenced by Managers
that Affect Stock Price
 Projected cash flows
 Timing of cash flow streams
 Risk of projected cash flows (earnings)
 Use of debt (capital structure)
 Dividend policy
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16. Agency Relationships
 An agency relationship exists whenever a
principal hires an agent to act on his or her
behalf.
 An agency problem results when the agent
makes decisions that are not in the best
interest of principals
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17. Stockholders versus Managers
 Managers are naturally inclined to act in their
own best interests.
 Mechanisms to motivate managers to act in
shareholder’s best interest
 Managerial compensation (incentives)
 Shareholder intervention
 Threat of takeover
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18. Business Ethics
 Webster: “A standard of conduct and moral
behavior.”
 Business Ethics: A company’s attitude and
conduct toward its employees, customers,
community, and stockholders
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19. 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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20. Forms of Business in
Other Countries
 Non-US firms have higher concentrations of
ownership
 Nature of relationship with financial
institutions differs from U.S.
 U.S. firms have a more dispersed ownership
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21. Multinational Corporations
1. To seek new markets
2. To seek raw materials
3. To seek new technology
4. To seek production efficiency
5. To avoid political and regulatory hurdles
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Five reasons firms go “international”

22. Factors Distinguishing Domestic
Firms from Multinational Firms
 Different currency denominations
 Economic and legal ramifications
 Language differences
 Cultural differences
 Role of governments
 Political risk
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