FINMA CHAPTER 1: - Banking, personal financial planning,

investments, real estate, and insurance

Finance - science and art of managing money
- How firms invest money to earn a profit
- Whether to reinvest profits or distribute them
back to investors
Financial Services - design and delivery of advice and
financial products to individuals, businesses,
governments.
Managerial Services - FINANCIAL MANAGERS - financial
affairs of all types of businesses: private and public ,
large and small, profit seeking and not-for-profit
- Developing a financial plan or budget
- Extending credit
- Evaluating proposed large expenditures
- Raising money to fund operations

LEGAL FORMS OF BUSINESS ORGANIZATION

SOLE PROPRIETORS PARTNERSHIPS CORPORATIONS

Strengths - Owner receives all - Can raise more - Limited liability

profits (or losses) funds - Large size
- Low organizational - Borrowing power - Stock is readily
costs enhanced transferable
- Income included and - More brain power - Long life
taxed on proprietor’s and managerial - Can hire
personal tax return skill professional
- Independence - Income included managers
- Secrecy and taxed on - Better access
- Ease of dissolution partner’s personal to financing
tax return

Weaknesses - Unlimited liability - Unlimited liability - Higher taxes

- Limited fund-raising - Dissolved when a - More
power partner dies expensive to
- Proprietor - jack of all - Difficult to organize
trades liquidate - Greater govt
- Difficult to give regulation
employees long term - Lacks secrecy
career opportunities
- Lacks continuity

Board of directors - approving strategic goals

Articles of Partnership - written contract to and plans, general policy, guiding corporate
formally establish business partnership affairs, and approving major expenditures

Corporation - entity created by law President / CEO - managing day-to-day

- Stockholders - owners - residual activities and carrying out policies established
claimants by the board of directors
- Limited liability
- Common stock - purest most basic form Limited Partnerships - one or more partners
of corporate ownership have limited liability, at least one general
- Dividends - periodic distributions of partner
cash to stockholders
S Corporation - 100 or fewer stockholders to
choose to be taxed as partnerships
- Benefits of corporations, tax advantages
of partnerships
Limited Liability Company - owners have
limited liability and taxation as a partnership
- LLC can own more than 80% of another
copr, partnerships, or non-US residents
can own LLC shares
Limited liability Partnerships - partners are
liable for their own acts of malpractice but not
for those of other partners
- Taxed as a partnership
GOAL OF THE FIRM
MAXIMIZING SHAREHOLDER WEALTH
- Simplest and best measure - share price
- Maximize share/stock price
- Only take actions expected to increase
shareholder wealth
- Key variable - return (cash flows) and
risks
MAXIMIZE PROFIT
- EPS - amount earned on behalf of each
outstanding share of common stock
- Total earnings / outstanding stocks
- ≠ highest possible share price
TIMING - receipt of funds sooner than later is
preferred
CASH FLOWS - higher earnings do not
necessarily translate into a higher stock price
- Increased earnings + increased future
cash flow = higher stock price
RISKS - chance that actual outcomes may differ
from expected
- Return and risk - key determinants of of
share price = wealth of owners
Risk Averse - requiring compensation to bear
risk
STAKEHOLDERS - employees, customers,
suppliers, creditors, owners and others who
have a direct economic link to the firm
- Not to maximize stakeholder well-being
but to PRESERVE IT
- Social responsibility
BUSINESS ETHICS - standards of conduct or
moral judgment
Considering Ethics:
Robert A. Cooke - noted ethicist:
1.) Is the action arbitrary or capricious?
Does it unfairly single out an individual?
2.) Does the action violate the moral or
legal rights of any individual or groups?
3.) Does the action conform to accepted
moral standards?
4.) Are there alternative courses of action
that are less likely to cause actual or
potential harm?
SARBANES-OXLEY ACT OF 2002 - have a code of
ethics in place
- Report any waivers of those codes for
senior management
- Eliminating corporate disclosure and
conflict of interest problems
ETHICS AND SHARE PRICE - reduce potential
litigations and judgment costs, maintain positive
corporate image, build shareholder confidence
and gain loyalty, commitment, and respect
FINANCIAL MANAGERS KEY DECISIONS:
- Investment decisions
- Capital budgeting
- Financing Decisions
 - Capital
- Working capital decisions
ORGANIZATION OF THE FINANCE FUNCTION
Treasurer - firm’s chief financial manager who
manages firm’s cash, oversees its pension plans
and managing risks
Controller - chief accountant - accounting
activities, corporate accounting to
management, financial accounting and cost
accounting
Foreign exchange manager - managing and
monitoring exposure to loss from currency
fluctuations
RELATIONSHIP TO ECONOMICS:
MARGINAL COST-BENEFIT ANALYSIS - financial
decisions must be made and actions taken only
when added benefits exceed the added costs
RELATIONSHIP TO ACCOUNTING:
Emphasis on cash flows - accountant - develop
and report data - accrual basis
- Financial manager - cash flows -
maintaining firm’s solvency
Decision Making - accountants - collection and
presentation of financial data
- Financial managers - evaluate, develop
additional data, make decisions
PRIMARY ACTIVITIES OF THE FINANCIAL
MANAGER - making investment (what type of
assets to hold) and financing (how to raise
money to pay for the assets) decisions
Corporate Governance - rules, processes, and
laws by which companies are operated,
controlled and regulated
Individual investors - small quantities of shares
to meet personal investment goals
- Less influence individually; usually acts
as a whole or group
Institutional investors - large quantities of
securities on behalf of individuals, businesses,
and governments
- Directly influence corporate governance
- exerting pressure on management
THE AGENCY ISSUE
- Managers - agents
- Shareholders - principals
- Principal-agent relationship - agent acts
on behalf of the principal
THE AGENCY PROBLEM - managers deviate
from the goal of maximization of shareholders’
wealth; personal goals > organizational goals
MANAGEMENT COMPENSATION PLANS
- Incentive plans - tie management
compensation to share price
- Stock options - allow management to
benefit from increases in stock price
over time
- Performance plans - tie management
compensation to EPS or growth in EPS
- Performance shares - shares given to
management as a result of meeting
stated performance goals
- Cash bonuses - cash payments ties to
the achievement of certain goals
THREAT OF TAKEOVER
- Another firm believes it can enhance
troubled firm’s value by restructuring its
management, operations, and financing
- External corporate governance