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CHAPTER 1

An Overview of FinancialManagement

Career Opportunities

Forms of Businesses

Goals of the Corporation

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Career Opportunities in

Finance Money and capital markets

Investments

Financial management

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Responsibility of the Financial

Staff Maximize stock value by:

Forecasting and planning

Investment and financing decisions

Coordination and control

Transactions in the financial markets

Managing risk

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Role of Finance in a Typical

Business OrganizationBoard of Directors

President

VP: Sales VP: Finance VP: Operations

Treasurer Controller

Credit Manager

Inventory Manager

Capital Budgeting Director

Cost Accounting

Financial Accounting

Tax Department

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Alternative Forms of Business

Organization Sole proprietorship

Partnership

Corporation

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Sole proprietorships &

Partnerships Advantages

Ease of formation

Subject to few regulations No corporate income taxes

Disadvantages

Difficult to raise capital Unlimited liability Limited life

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Corporation Advantages

Unlimited life

Easy transfer of ownership Limited liability Ease of raising capital

Disadvantages Double taxation Cost of set-up and report filing

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Financial Goals of the Corporation The primary financial goal is

shareholder wealth maximization,

which translates to maximizing stock price. Do firms have any responsibilities to

society at large? Is stock price maximization good or bad

for society? Should firms behave ethically?

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Is stock price maximization the

same as profit maximization? No, despite a generally high correlation

amongst stock price, EPS, and cash flow.

Current stock price relies upon currentearnings, as well as future earnings andcash flow.

Some actions may cause an increase inearnings, yet cause the stock price todecrease (and vice versa).

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Factors that affect stock price Projected cash flows

to shareholders

Timing of the cashflow stream

Riskiness of the cashflows

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Basic Valuation Model

To estimate an asset’s value, one estimates thecash flow for each period t (CFt), the life of the

asset (n), and the appropriate discount rate (k) Throughout the course, we discuss how to

estimate the inputs and how financial managementis used to improve them and thus maximize a

firm’s value.

∑= +=

+++

++

+=

n

1tt

t

n

n

2

2

1

1

.k)(1

CF

k)(1

CF

k)(1

CF

k)(1

CF Value

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Factors that Affect the Level

and Riskiness of Cash Flows Decisions made by financial managers:

Investment decisions

Financing decisions (the relative use of debt financing)

Dividend policy decisions

The external environment

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