Ch.

1 - An Introduction to

Financial Management

2002, Prentice Hall, Inc.

 What is Finance? Perspective of Finance

Past Financial Statement Analyses Present Short-Term Financial Management Future Capital Budgeting

Goals of the Firm Ten Basic Principles of Finance

Goal of the Firm 1) Profit Maximization?

this goal ignores: a) TIMING of Returns
(Time Value of Money - Ch. 5)

b) UNCERTAINTY of Returns
(Risk - Ch. 6)

Goal of the Firm

2) Shareholder Wealth Maximization?
this is the same as:

a) Maximizing Firm Value b) Maximizing Stock Price

GOALS OF THE CORPORATION

1. 2. 3. 4.

5.
6. 7. 8.

9.
10. 11. 12.

13.
14. 15.

Maximize Shareholders Wealth Optimum Cash Flow Management Optimum Investment Management Optimum Inventory Level Management Optimum Debt-Equity Ratio Optimum Risk-Return Trade-Off Optimum Dividend Payout Ratio Minimize Interest & Capital Cost Minimize Tax Burden Effective & Efficient Financial Control Effective & Efficient Financing of Growth Optimize Social & Societal Welfare Avoiding Bankruptcy Maximize Distribution of Wealth Maximize Distribution of Ownership

Legal Forms of Business

1) Sole Proprietorship
A business owned by a single individual. Owner maintains title to the firms assets. Owner has unlimited liability.

2) Partnership
Similar to a sole proprietorship, except that there are two or more owners.

Legal Forms of Business

2a) General Partnership
All partners have unlimited liability.

2b) Limited Partnership

Consists of one or more general partners, who have unlimited liability, and One or more limited partners (investors) whose liability is limited to the amount of their investment in the business.

Legal Forms of Business

3) Corporation
A business entity that legally functions separate and apart from its owners. Owners liability is limited to the amount of their investment in the firm. Owners hold common stock certificates, and ownership can be transferred by selling the certificates.

The Corporation and Financial Markets

The Corporation and Financial Markets

Corporation

The Corporation and Financial Markets

Corporation Investors

The Corporation and Financial Markets

Corporation Investors

Government

The Corporation and Financial Markets

Corporation cash Investors

Government

The Corporation and Financial Markets

Corporation cash securities Investors

Government

The Corporation and Financial Markets

Corporation cash securities
Secondary markets

Investors

Government

The Corporation and Financial Markets

Corporation cash securities
Secondary markets

Investors

Government

The Corporation and Financial Markets

Corporation cash securities
Secondary markets

Investors

Government

The Corporation and Financial Markets

Corporation cash securities
Secondary markets

Investors

Cash flow

Government

The Corporation and Financial Markets

Corporation cash securities
Secondary markets

Investors

Cash flow
tax

Government

The Corporation and Financial Markets

Corporation cash securities
reinvest
Secondary markets

Investors

Cash flow
tax

Government

The Corporation and Financial Markets

Corporation cash
Debt & equity securities

Investors

reinvest

Cash flow
tax

Interest, dividends, etc.

Secondary markets

Government

BUSINESS
INVESTMENT

The Corporation and Financial Markets Primary Market

The Corporation and Financial Markets Primary Market

Market in which new issues of a security are sold to initial buyers.

The Corporation and Financial Markets Primary Market

Market in which new issues of a security are sold to initial buyers.

Secondary Market

The Corporation and Financial Markets Primary Market

Market in which new issues of a security are sold to initial buyers.

Secondary Market
Market in which previously issued securities are traded.

The Corporation and Financial Markets Initial Public Offering (IPO)

The Corporation and Financial Markets Initial Public Offering (IPO)

The first time the firms stock is sold to the general public.

The Corporation and Financial Markets Initial Public Offering (IPO)

The first time the firms stock is sold to the general public.

Seasoned New Issue

The Corporation and Financial Markets Initial Public Offering (IPO)

The first time the firms stock is sold to the general public.

Seasoned New Issue

A new stock offering by a firm that already has stock that is traded in the secondary market.

FINANCIAL MARKETS, INSTITUITION & INSTRUMENTS Primary Markets

Secondary Markets
Money Markets
o o o o o o o o T-Bills Federal Agency Discount Notes Short Term Munis Federal Funds Negotiable Certificate of Deposits Commercial Paper Bankers Acceptance Repos

Mortgage Markets

FINANCIAL MARKETS, INSTITUITION & INSTRUMENTS Capital Markets

o Debt o Equity
o Common Shares o Preferred Shares

Bond Markets
o o o o

Futures Market, i.e., real or financial assets

o Options o Forwards o Derivatives

T-Bonds Agency Debt Munis Bonds Corporate Bonds

Financial Management Axioms

1) Risk - return trade-off 2) Time value of money 3) Cash - not profits - is king 4) Incremental cash flows count 5) The curse of competitive markets 6) Efficient capital markets 7) The agency problem 8) Taxes bias business decisions 9) All risk is not equal 10) Ethical dilemmas are everywhere in finance

BUSINESS
INVESTMENT

ASSETS
C A + F A
Plant & Equipment Machinery Capital WIP

= C L

FINANCE
+ LTD + EQUITY
Long Term Preferred Debt Share Bank Loans Ordinary Share Notes Share Premium Treasury Stock Bonds Retained Earnings Reserves

S/T INV + L/T INV S/T FINANCE + L/T FINANCE

Cash Marketable Securities Accounts Receivables Inventory Others

Short Term Loan Current Maturities Accounts Payable Notes Accrued Expenses Proposed Dividend

Land Investments (Land)

S/T= SHORT TERM, L/T=LONG TERM, INV= INVESTMENT CA= CURRENT ASSETS, FA= FIXED ASSETS, CL= CURRENT LIABILITY CM= CURRENT MATURITY, WIP= WORK IN PROGRESS