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FINANCIAL MANAGEMENT REVIEWER Is sometimes referred to as financial economics.

CHAPTER 1 Finance

Defined as the art and science of managing

Primary economic principal used by financial
Finance managers which says that financial decisions
should be implemented only when added
benefits exceed added costs.
Concerned with the process, institutions,
Marginal cost-benefit analysis
markets, and instruments involved in the
transfer of money among individuals,
businesses, and governments.
Finance (treasurer)

Accounting (controller)
Is the area of finance concerned with the design
and delivery of advice and financial products to
individuals, businesses, and government. Major Difference:
Financial Services Accountants - accrual method

Finance - cash flows

Concerned with the duties of the financial
manager in the business firm.
Accounting - presentation of financial data
Managerial finance
Financial manager - with analyzing and
Actively manages the financial affairs of any
type of business, whether private or public,
large or small, profit-seeking or not-for-profit. Balance Sheet:

Financial manager
Goal of the Firm:

Are also more involved in developing corporate Maximize Shareholder Wealth!!!

strategy and improving the firms competitive

Financial manager

Is actually an outgrowth of economics.

Share price = Future dividends (level timing) They hold and trade large quantities of
required Return (risk) securities for individuals, businesses, and
governments and tend to have a much greater
impact on corporate governance.
all groups of individuals who have a direct
Institutional investors
economic link to the firm including employees,
customers, suppliers, creditors, owners, and
others who have a direct economic link to the
Eliminated many disclosure and conflict of
interest problems that surfaced during the early
Stakeholders 2000s.

Sarbanes-Oxley Act of 2002

Prescribes that the firm make a conscious effort

to avoid actions that could be detrimental to
The standards of conduct or moral judgment
the wealth position of its stakeholders.
"Stakeholder View"

** Negative publicity often leads to negative

The system used to direct and control a
impacts on a firm

Corporate Governance
**Robert A. Cooke

Defines the rights and responsibilities of key

corporate participants such as shareholders, the Exists whenever a manager owns less than
board of directors, officers and managers, and 100% of the firms equity,
other stakeholders.
Agency problem
Corporate Governance

**managers would agree with shareholder

Are investors who purchase relatively small wealth maximization IN THEORY
quantities of shares in order to earn a return on
idle funds, build a source of retirement income,
or provide financial security. __ Such as major shareholders and the threat of
Individual investors a hostile takeover act to keep managers in

Market Forces
Are investment professionals who are paid to
manage other peoples money.

Institutional investors
Are the costs borne by stockholders to maintain
a corporate governance structure that
minimizes agency problems and contributes to
the maximization of shareholder wealth.

Agency Costs

Is an incentive allowing managers to purchase

stock at the market price set at the time of the

Stock option

Tie management compensation to measures

such as EPS growth; performance shares and/or
cash bonuses are used as compensation under

these plans.

Performance plans

** Recent studies have failed to find a strong

relationship between CEO compensation and
share price.

While transactions in long-term securities take

place in
Firms that require funds from external sources
can obtain them in three ways: Capital market

Through a bank or other financial institution

Through financial markets Securities are first issued through the

Through private placements Primary market

Are intermediaries that channel the savings of Once issued, securities then trade on the
individuals, businesses, and governments into
Secondary markets
loans or investments.

Financial institutions
Money market transactions can be executed

Directly or through an intermediary.

Key suppliers and demanders of funds are:

Individuals, businesses, and governments.

The international equivalent of the domestic
(U.S.) money market is the
Eurocurrency market
Individuals - net suppliers

Businesses and governments - net demanders

Key capital market securities

Provide a forum in which suppliers of funds and
Common and preferred stock (equity)
demanders of funds can transact business

Financial markets Are long-term debt instruments used by

businesses and government to raise large sums
of money or capital
Two key financial markets are:
Money market and the capital market

Are units of ownership interest or equity in a

Transactions in short term marketable corporation.
securities take place in the
Common stock
Money market
Are tangible secondary markets where
outstanding securities are bought and sold.

Organized securities exchanges

Is an intangible market for securities


Over-the-counter (OTC) market

Unlike organized exchanges, the __ is both a

primary market and a secondary market.

Over-the-counter (OTC) market

Is a computer-based market where dealers

make a market in selected securities and are
linked to buyers and sellers through the
NASDAQ System.

Over-the-counter (OTC) market

Corporations and governments typically issue

bonds denominated in dollars and sell them to
investors located outside the United States.

Eurobond market

Is a market for foreign bonds, which are bonds

issued by a foreign corporation or government
that is denominated in the investors home
currency and sold in the investors home

The foreign bond market

Allows corporations to sell blocks of shares to

investors in a number of different countries

International equity market