chapter 1-introdution to managerial finance
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Chapter 1Introduction toManagerial Finance
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Learning Outcomes Chapter 1
Explain what finance entails and why everyone should have anunderstanding of basic financial concepts
Identify different forms of business organization as well as theadvantages and disadvantages of each.
Identify (1) major goals that rms pursue and (2) what a rmsprimary goal should be.
Explain the role that ethics and good governance play insuccessful businesses.
Describe how foreign rms differ from U.S. rms and identifyfactors that affect nancial decisions in multinational rms.
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What is Finance?
Finance is concerned with decisions aboutmoney (Cash Flows)Finance decisions deal with how money israised and usedEverything else being equal:
More value is preferred to less
The sooner cash is received the more value it hasLess risky assets are more valuable than riskierassets
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General Areas of Finance
Financial Markets and Institutions
Investments
Financial Services
Managerial Finance
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Finance in the Organizational Structure of the Firm
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Board of Directors
President (CEO)
Treasurer ControllerCredit
ManagerInventoryManager
Director of CapitalBudgeting
Financialand CostAccounting
TaxDepartment
Vice-President:Finance (CFO)
Vice-President:Sales
Vice-President:Information Systems (CIO)
Vice-President:Operations (COO)
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Alternative Forms of Business Organization
Proprietorship
Partnership
Corporation
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Proprietorship
Advantages:Ease of formationSubject to few government regulationsNo corporate income taxes
Limitations:Unlimited personal liability
Limited lifeTransferring ownership is difficultDifficult to raise capital
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Partnership
Like a proprietorship, except two or moreowners
A partnership has roughly the sameadvantages and limitations as aproprietorship
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Corporation
Advantages:Unlimited lifeEasy transfer of ownershipLimited liabilityEase of raising capital
Disadvantages:
Cost of set-up and report filingDouble taxation
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Hybrid Forms of Business
Limited Liability Partnership (LLP)
Limited Liability Company (LLC)
S Corporation
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Business Organized as a Corporation: Value Maximized
Limited liability reduces risk increasing marketvalueEase of raising capital allows takingadvantage of growth opportunitiesOwnership can be easily transferred thusinvestors would be willing to pay more for a
corporation
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Goals of the Corporation
Primary goal: stockholder wealth maximization translates to maximizing stock price.Managerial incentivesSocial responsibility
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Managerial Actions toMaximize Stockholder Wealth
Capital Structure Decisions
Capital Budgeting Decisions
Dividend Policy Decisions
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Value of the Firm
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Factors Influenced by Managersthat 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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Agency Relationships
An agency relationship exists whenever aprincipal hires an agent to act on his or herbehalf.
An agency problem results when the agentmakes decisions that are not in the bestinterest of principals
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Stockholders versus Managers
Managers are naturally inclined to act in theirown best interests.Mechanisms to motivate managers to act inshareholders best interest
Managerial compensation (incentives)Shareholder intervention
Threat of takeover
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Business Ethics
Webster: A standard of conduct and moralbehavior.
Business Ethics: A companys attitude andconduct toward its employees, customers,community, and stockholders
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Corporate Governance
The set of rules that a firm follows whenconducting business
As a result of the Sarbanes-Oxley Act of 2002, firms are revising their corporategovernance policiesGood corporate governance generates higher
returns to stockholders
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Forms of Business inOther Countries
Non-US firms have higher concentrations of ownership
Nature of relationship with financialinstitutions differs from U.S.
U.S. firms have a more dispersed ownership
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Multinational Corporations
1. To seek new markets
2. To seek raw materials
3. To seek new technology4. To seek production efficiency
5. To avoid political and regulatory hurdles
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Five reasons firms go international
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Factors Distinguishing DomesticFirms from Multinational Firms
Different currency denominations
Economic and legal ramifications
Language differencesCultural differences
Role of governments
Political risk
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