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Copyright © 2001 by Harcourt, Inc. All rights reserved.
WELCOME TO FIN 300!
I’m sure you’re all excited to be here!
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Guest Lecturer:Alex Wilson, Ph.D.
Prof. Ammermann’s information follows …
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Peter A. Ammermann, Ph.D.“Dr. Pete”
CBA 328 Phone: 985-7526Email = [email protected] =
www.csulb.edu/~pammerma Office Hours: Immediately after
class and whenever else I happen to be in (or by appt.)
My background …
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Important Syllabus Info.
Two tests, plus comprehensive departmental final
Homework projects stock market game
Weightings:Tests = total of 50%
• best = 30%• 2nd best = 20%
Homework and Project = 15%Final = 35%
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
INTRODUCTION
What is finance all about?
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Big Picture: What is Finance??
Ultimately, the gathering and distribution of cash.
Theoretical basis is Economics - but we’re more applied.
Our language is Accounting - but we’re more fun!
Our prey is Strategy & Marketing; our predator, the Markets
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Fundamentals of Financial ManagementNinth Edition
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
ISBN 0-03-031478-X
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Career opportunities
Issues of the new millennium
Forms of business organization
Goals of the corporation
Agency relationships
CHAPTER 1An Overview of Financial Management
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Money and capital markets
Investments
Financial management
Career Opportunities in Finance
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Use of computers and electronic transfers of information
The globalization of business
Financial ManagementIssues of the new millennium
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
3M 51.7 26.9Chase Manhattan 27.8 26.6Coca-Cola 62.3 64.6Exxon 80.1 65.1General Electric 23.9 31.1General Motors 30.8 68.0IBM 56.8 68.9McDonald’s 60.8 71.7Merck 24.9 27.4Walt Disney 16.7 18.9
Percentage of Revenue and Net Income from Overseas Operations for
10 Well-Known Corporations, 1998Percentage of Percentage of
Revenue Originated Net IncomeCompany Overseas Generated Overseas
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Forecasting and planning
Investment and financing decisions
Coordination and control
Transactions in the financial markets
Managing risk
Responsibilities of the Financial Staff
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Sole proprietorship
Partnership
Corporation
Alternative Forms of Business Organization
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Advantages:Ease of formationSubject to few regulationsNo corporate income taxes
Disadvantages:Limited lifeUnlimited liabilityDifficult to raise capital
Sole Proprietorship
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
A partnership has roughly the same advantages and disadvantages as a sole proprietorship.
Partnership
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Advantages:Unlimited lifeEasy transfer of ownershipLimited liabilityEase of raising capital
Disadvantages:Double taxationCost of set-up and report filing
Corporation
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Another Possible Disadvantage of Corporations:
“Agency” Problems
(We’ll get back to this in a minute ...)
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
The primary goal is shareholder wealth maximization, which translates to maximizing stock price.Do firms have any responsibilities
to society at large?Is stock price maximization good or
bad for society?Should firms behave ethically?
Goals of the Corporation
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
And Now Back to Agency Problems ...
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An agency relationship exists whenever a principal hires an agent to act on their behalf.
Within a corporation, agency relationships exist between:
Shareholders and managers
Shareholders and creditors
Agency Relationships
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
What is the problem here?
Many times the groups have different goals and objectives.
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Managers are naturally inclined to act in their own best interests.e.g., Ross Johnson & RJR-Nabisco
But the following factors affect managerial behavior:Managerial compensation plansDirect intervention by shareholdersThe threat of firingThe threat of takeover
Shareholders versus Managers
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors.
In the long run, such actions will raise the cost of debt and ultimately lower stock price.
Shareholders versus Creditors
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Projected cash flows to shareholders
Timing of the cash flow stream
Riskiness of the cash flows
Factors that Affect Stock Price
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Copyright © 2001 by Harcourt, Inc. All rights reserved.
Factors that Affect the Level and Riskiness of Cash Flows
Decisions made by financial managers:Investment decisionsFinancing decisions (the relative
use of debt financing)Dividend policy decisions
The external environment