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Key Concepts and Skills

•Know the basic types of financial managementdecisions and the role of the financial manager 

• Know the financial implications of the different

forms of business organization

• Know the goal of financial management

• Understand the conflicts of interest that can

arise between owners and managers

• Understand the various types of financial

markets

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Chapter Outline

•Corporate Finance and the Financial anager 

• Forms of !usiness "rganization

• #he $oal of Financial anagement

• #he %gency &roblem and Control of theCorporation

• Financial arkets and the Corporation

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Corporate Finance

•(ome important )uestions that are answeredusing finance

 * +hat long,term investments should the firm take

on-

 * +here will we get the long,term financing to pay

for the investment-

 * ow will we manage the everyday financial

activities of the firm-

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Financial Manager 

•Financial managers try to answer some or all ofthese )uestions

• #he top financial manager within a firm is

usually the Chief Financial "fficer 0CF"

 * #reasurer * oversees cash management2 credit

management2 capital e3penditures and financial

 planning

 * Controller * oversees ta3es2 cost accounting2financial accounting and data processing

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Financial Management Decisions

•Capital budgeting * +hat long,term investments or pro5ects should the

 business take on-

• Capital structure

 * ow should we pay for our assets- * (hould we use debt or e)uity-

• +orking capital management

 * ow do we manage the day,to,day finances of thefirm-

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Forms of Business Organization

•#hree ma5or forms in &akistan * (ole proprietorship

 * &artnership

• $eneral

• 7imited

 * Corporation

• (,Corp

• 7imited liability company

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Sole roprietorship

• %dvantages

 *  9asiest to start

 *  7east regulated

 *  (ingle owner keeps all

the profits

 *  #a3ed once as personal

income

• :isadvantages

 *  7imited to life of owner 

 *  9)uity capital limited to

owner;s personal wealth

 *  Unlimited liability

 *  :ifficult to sell

ownership interest

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artnership

• %dvantages

 *  #wo or more owners

 *  ore capital available

 *  =elatively easy to start

 *  >ncome ta3ed once as personal income

• :isadvantages

 *  Unlimited liability

• $eneral partnership

• 7imited partnership

 *  &artnership dissolves

when one partner dies or

wishes to sell

 *  :ifficult to transfer

ownership

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Corporation

• %dvantages

 *  7imited liability

 *  Unlimited life

 *  (eparation of ownership

and management

 *  #ransfer of ownership is

easy

 *  9asier to raise capital

• :isadvantages

 *  (eparation of ownership

and management

 *  :ouble ta3ation 0income

ta3ed at the corporate rate

and then dividends ta3ed

at personal rate

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!oal Of Financial Management

• +hat should be the goal of a corporation-

 * a3imize profit-

 * inimize costs-

 * a3imize market share-

 * a3imize the current value of the company;s

stock-

• :oes this mean we should do anything and

everything to ma3imize owner wealth-

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The "gency ro#lem

• %gency relationship

 * &rincipal hires an agent to represent their interest

 * (tockholders 0principals hire managers 0agents to

run the company

• %gency problem

 * Conflict of interest between principal and agent

• anagement goals and agency costs

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Managing Managers

• anagerial compensation

 * >ncentives can be used to align management andstockholder interests

 * #he incentives need to be structured carefully to

make sure that they achieve their goal• Corporate control

 * #he threat of a takeover may result in bettermanagement

• "ther stakeholders

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$ork the $e# %&ample

• #he >nternet provides a wealth of information

about individual companies

• "ne e3cellent site is finance.yahoo.com

• Click on the web surfer to go to the site2 choose

a company and see what information you can

findB

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Financial Markets

• Cash flows to the firm

• &rimary vs. secondary markets

 * :ealer vs. auction markets

 * 7isted vs. over the counter securities

•  D(9

•  %(:%E

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'uick 'uiz

• +hat are the three types of financialmanagement decisions and what )uestions arethey designed to answer-

• +hat are the three ma5or forms of business

organization-• +hat is the goal of financial management-

• +hat are agency problems and why do they

e3ist within a corporation-• +hat is the difference between a primary

market and a secondary market-

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