OVERVIEW OF FINANICAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT

OVERVIEW OF FINANICAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT

CHAPTER 1
OVERVIEW OF FINANCIAL MANAGEMENT
AND THE FINANCIAL ENVIRONMENT

1

TOPICS
Forms of business organization
Objective of the firm: Maximize wealth
Determinants of fundamental value
Financial securities, markets and institutions

2

finance important to all
managers?
Corporate finance provides the skills managers
need to:

◦ Identify and select the corporate strategies and
individual projects that add value to their firm.
◦ Forecast the funding requirements of their company,
and devise strategies for acquiring those funds.

3

Business Organization
from Start-up to a Major
Corporation
Sole proprietorship
◦ Advantages:

◦ Ease of formation
◦ Subject to few regulations
◦ No corporate income taxes

oDisadvantages:

◦ Limited life
◦ Unlimited liability
◦ Difficult to raise capital to support growth

4

into a
Partnership
A partnership has roughly the same advantages
and disadvantages as a sole proprietorship.

5

Becoming a
Corporation
A corporation is a legal entity separate from
its owners and managers.
◦ Advantages:

◦ Unlimited life
◦ Easy transfer of ownership
◦ Limited liability
◦ Ease of raising capital

◦ Disadvantages:

◦ Double taxation
◦ Cost of set-up and report filing
6

Becoming a Public
Corporation and Growing
Afterwards
Initial Public Offering (IPO) of Stock

◦ Raises cash
◦ Allows founders and pre-IPO investors to “harvest”
some of their wealth

Subsequent issues of debt and equity

7

Agency Problems and
Corporate
Governance
Agency problem: managers may act in their own interests
and not on behalf of owners (stockholders)

Corporate governance: is the set of rules that control a

company’s behavior towards its directors, managers,
employees, shareholders, creditors, customers, competitors,
and community.

Corporate governance can help control agency
problems.
8

What should be
management’s primary
objective?
The primary objective should...

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