Chapter 1: Introduction to Financial Management

Purpose of the chapter:

 Indicate the primary goals of financial management

 Understand the three major areas of financial management
Financial management has focuses on risk-return relationship and the maximization of
return for a given level of risk.
Financial managers attempt to achieve wealth maximization through daily activities such as
credit and inventory management and through longer-term decisions related to raising
funds.
Financial managers must carefully consider domestic and international business conditions
in carrying out their responsibilities.
The decision function of financial management can be broken down into three major areas:
1. Investment Decision
2. Financing Decision
3. Asset Management Decision

Investment Decision
Determine the total amount of assets needed to be held by the firm.
Answer the questions:

 What is the optimal firm size?

 What specific assets should be acquired
 What asset (if any) should be reduced or eliminated

Financing Decision
Determine how the assets will be financed.
Answer the questions:

 What is the best type of financing?

 What is the best financing mix?
 What is the best dividend policy?

Asset Management Decision

Determine how the assets will be handled.
Answer the questions:

 What techniques should be employ to effectively and efficiently use asset.