Professional Documents
Culture Documents
An Overview of Financial
Management and the
Financial Environment
Topics in Chapter
CH1
1-2
Attributes of Successful
Companies
CH1
1-3
The Corporate Life Cycle
CH1
1-4
Starting as a Proprietorship
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• Advantages:
– Ease of formation
– Subject to few regulations
– No corporate income taxes
• Disadvantages:
– Difficult to raise capital to support
growth
– Unlimited liability
– Limited life span
1-5
Starting as or Growing into a
Partnership
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1-7
Advantages and Disadvantages
of a Corporation
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• Advantages:
– Unlimited life
– Easy transfer of ownership
– Limited liability
– Ease of raising capital
• Disadvantages:
– Double taxation
– Higher setup cost
– Endless report filing
1-8
What should be management’s
primary objective?
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1-9
Stock Price Maximization and
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Social Welfare
• Do firms have any responsibilities
to society at large? Yes!
• Unethical behavior destroys public
trust and confidence.
• Maximizing share price is good for
society. Why?
• Shareholders are also members of
society.
1-10
Is Maximizing stock price
CH1
good for consumers?
• Consumer welfare is higher in
capitalist free market economies
than in communist or socialist
economies due to competition
• Consumers can improve quality of
life by the direct or the indirect
investments in the stock market
1-11
Is maximizing stock price good for
employees?
CH1
1-15
Determinants of a Firm’s Value
CH1
1-16
Who are the providers (savers) and
users (borrowers) of capital?
CH1
1-17
Capital Allocation Process
CH1
1-18
Transfer of Capital from
Savers to Borrowers
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1-19
Cost of Money
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• Production opportunities
• Time preferences for consumption
• Risk
• Expected inflation
1-21
What economic conditions affect
the cost of money?
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1-22
Financial Securities
CH1
Money •T-Bills
•Banker’s Acceptances
•Options
•Futures
Market •Commercial papers •Forward
•MMMFs contract
•EuroCanadian dollars
1-24
Typical Rates of Return
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Commercial loans:
Tied to prime 5.25 +
or LIBOR 3.05 +
1-25
Typical Rates (cont’d)
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1-26
What are some financial
institutions?
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• Investment banks
• Commercial banks
• Trust companies
• Credit unions
• Life insurance companies
• Mutual funds
– Money Market Funds (MMMFs)
– Exchanged Traded Funds (ETFs)
• Pension funds
• Hedge funds
1-27
Types of Financial Markets
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1-29
Spot vs. Futures Markets
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1-30
Primary vs. Secondary
Markets
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• Primary
– New issue (IPO or seasoned)
– Key factor: issuer receives the
proceeds from the sale.
• Secondary
– Existing owner sells to another party.
– Issuing firm doesn’t receive proceeds
and is not directly involved.
1-31
Private vs. Public Markets
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• Private markets
– Transactions are worked out directly
between two parties
– Lack of liquidity
• Public markets
– Standardized contracts are traded on
an organized
– More liquid and transparent
1-32