Lawrence J. Gitman Jeff Madura
Financial management 
(eview the common forms of )usiness or#ani*ation.
+escri)e the financial mana#ement function, its relationship to economics and accountin#, and the financial mana#ers primar" activities.
E-plain the wealth ma-imi*ation #oal of the firm and the role of ethics in the firm.
+iscuss the a#enc" issue.
Learning Goals
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(eview the fundamentals of )usiness ta-ation of ordinar" income and capital #ains.
/nderstand the effect of depreciation on the firm0s cash flows, the deprecia)le value of an asset, its deprecia)le life, and ta- depreciation methods.
+iscuss the firm0s cash flows, particularl" the statement of cash flows.
Learning Goals
Basic Forms
Sole Proprietorships
Most )usinesses start out as sole proprietorships.
 
Partnerships
 &ccount for 1% percent of all )usinesses.
 
Corporations
2eparate le#al entit".
 &lthou#h onl" 14 percent of all )usinesses are incorporated, corporations account for nearl" 9% percent of receipts and 8% percent of net profits.
Most #rowin# small )usinesses eventuall" )ecome corporations.
 
Strengths and Weaknesses
of Organization Forms
Strengths and Weaknesses
of Organization Forms
Ta)le 9.1 3anel !:
Corporate Organization
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The si*e and importance of the mana#erial finance function depends on the si*e of the firm.
In small companies, the finance function ma" )e performed )" the compan" president or accountin# department.
 &s the )usiness e-pands, finance t"picall" evolves into a separate department lin;ed to the president.
The Managerial Finance Function
The Managerial Finance Function
(elationship to Economics
The field of finance is actuall" an out#rowth of economics.
In fact, finance is sometimes referred to as financial economics.
 
The Managerial Finance Function
(elationship to Economics
 
The Managerial Finance Function
The firm0s finance treasurer: and accountin# controller: functions are closel"related and overlappin#.
 
The Managerial Finance Function
(elationship to &ccountin#
<ne ma5or difference in perspective and emphasis )etween finance and accountin# is that accountants #enerall" use the accrual method, while in finance the focus is on cash flows.
 
The Managerial Finance Function
2ales= >1%%,%%% 4%? still uncollected:
Cost of Goods= >7%,%%% all paid in full under supplier terms:
E-penses= >%,%%% all paid in full:
 
The Managerial Finance Function
 &CC(/&L C&2B
The Managerial Finance Function
Finance and accountin# also differ with respect to decisionma;in#.
'hile accountin# is primaril" concerned with the presentation of financial data, the financial mana#er is primaril" concerned with anal"*in# and interpretin# this information for decisionma;in# purposes.
 
e! "cti#ities
 
3rofit ma-imi*ation fails to account for differences
in the level of cash flows as opposed to profits:, the timin# of these cash flows, and the ris; of these cash flows.
Goal of the Firm
Goal of the Firm
Ma-imi*e 2hareholder 'ealth
'h"
Hecause ma-imi*in# shareholder wealth properl" considers cash flows, the timin# of these cash flows, and the ris; of these cash flows.
This can )e illustrated usin# the followin# simple valuation euation=
2hare price Future dividends
ris; of cash flows
Goal of the Financial Manager 
 
Goal of the Financial Manager 
Economic Kalue &dded EK&:
Economic value added EK&: is a popular measure used )" man" firms to determine whether an investment proposed or e-istin#positivel" contri)utes to the owners0 wealth.
EK& is calculated )" su)tractin# the cost of funds used to finance an investment from its afterta- operatin# profits.
 
Goal of the Financial Manager 
'hat a)out other sta;eholders
2ta;eholders include all #roups of individuals who have a direct economic lin; to the firm includin#= Emplo"ees
Customers
2uppliers
Creditors
<wners
The sta;eholder viewN prescri)es that the firm ma;e a conscious effort to avoid actions that could )e detrimental to the wealth position of its sta;eholders.
2uch a view is considered to )e Nsociall" responsi)le.N
 
The $ole of %thics
Ethics +efined
Ethics= the standards of conduct or moral 5ud#ment have )ecome an overridin# issue in )oth our societ" and the financial communit".
Ethical violations attract widespread pu)licit".
 
The $ole of %thics
<pinions
 
The $ole of %thics
To assess the ethical via)ilit" of a proposed action, as;=
+oes the action unfairl" sin#le out an individual or #roup
+oes the action affect the morals, or le#al ri#hts of an" individual or #roup
+oes the action conform to accepted moral standards
 
The $ole of %thics
Ethics and 2hare 3rice
(educe liti#ation and 5ud#ment costs
Maintain a positive corporate ima#e
Huild shareholder confidence
Gain the lo"alt" and respect of all sta;eholders
 
The "genc! &ssue
The 3ro)lem
'henever a mana#er owns less than 1%%? of the firm0s euit", a potential a#enc" pro)lem e-ists.
In theor", mana#ers would a#ree with shareholder wealth ma-imi*ation.
Bowever, mana#ers are also concerned with their personal wealth, 5o) securit", frin#e )enefits, and lifest"le.
 
The "genc! &ssue
(esolvin# the 3ro)lem
 
The "genc! &ssue
(esolvin# the 3ro)lem
E-amples would include )ondin# or monitorin# mana#ement )ehavior, and structurin# mana#ement compensation to ma;e shareholders0 interests their own.
 
Business Ta'ation
Hoth individuals and )usinesses must pa" ta-es on income.
The income of sole proprietorships and partnerships is ta-ed as the income of the individual owners, whereas corporate income is su)5ect to corporate ta-es.
Hoth individuals and )usinesses can earn two t"pes of income= ordinar" and capital #ains.
 
Business Ta'ation
<rdinar" Income
<rdinar" income is earned throu#h the sale of a firm0s #oods or services and is ta-ed at the rates depicted in Ta)le 9.! on the followin# slide.
Calculate federal income ta-es due if ta-a)le income is >8%,%%%.
Ta- P.14 - >4%,%%%:Q R P.!4 - >!4,%%%:Q R P. - >8%,%%% >64,%%%:Q
Ta- >14,4%
Business Ta'ation
<rdinar" Income
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'hat is the mar#inal and avera#e ta- rate for the previous e-ample
Mar#inal Ta- (ate ?
 &vera#e Ta- (ate >14,4%D>8%,%%% 19.1?
Business Ta'ation
 &vera#e and Mar#inal Ta- (ates  & firm0s mar#inal ta- rate represents the rate
at which additional income is ta-ed.
The avera#e ta- rate is the firm0s ta-es divided )" ta-a)le income.
This is illustrated usin# the simple e-ample )elow.
 
Business Ta'ation
Ta- on Interest and +ividend Income
For corporations onl", 6% percent of all dividend income received from an investment in the stoc; of another corporation in which the firm has less than !% percent ownership is e-cluded from ta-ation.
 
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 & firm with 1%%,%%% shares outstandin# needs to raise an additional >4%%,%%% in capital. The" can do so )" sellin# )onds that pa" 7? interest or )" issuin# 1%,%%% additional shares at >4%Dshare. The firm pa"s >.%% in dividends for each share outstandin#.
Business Ta'ation
In calculatin# ta-es, corporations ma" deduct operatin# e-penses and interest e-pense )ut not dividends paid.
 
Business Ta'ation
 
Business Ta'ation
+e)t versus Euit" Financin#
 &s the e-ample shows, the use of de)t financin# can increase cash flow and E32, and decrease ta-es paid.
The ta- deducti)ilit" of interest and other certain e-penses reduces the actual afterta-: cost to the profita)le firm.
 
Business Ta'ation
Capital Gains
 & capital #ain results when a firm sells an asset such as a stoc; held as an investment for more than its initial purchase price.
The difference )etween the sale price and the purchase price is called a capital #ain.
 
(epreciation
+epreciation is the s"stematic char#in# of a portion of the costs of fi-ed assets a#ainst annual revenues over time.
+epreciation for ta- purposes is determined )" usin# the modified accelerated cost recover" s"stem M&C(2:.
 
(epreciation
+epreciation and Cash Flows
Financial mana#ers are much more concerned with cash flows rather than profits.
To ad5ust the income statement to show cash flows from operations, all noncash char#es should )e added )ac; to net profit after ta-es.
 
(epreciation
(epreciation
+eprecia)le Kalue and +eprecia)le Life
/nder the )asic M&C(2 procedures, the deprecia)le value of an asset is its full cost, includin# outla"s for installation.
@o ad5ustment is reuired for e-pected salva#e value.
For ta- purposes, the deprecia)le life of an asset is determined )" its M&C(2 recover" predetermined period.
 
(epreciation
(epreciation
(epreciation
 
Cash Flo)
The statement of cash flows summari*es the firm0s cash flow over a #iven period of time.
The statement of cash flows is divided into three sections=
<peratin# flows
Investment flows
Financin# flows
 
Cash Flo)
Classif!ing Sources
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Cash Flo)
Cash Flo)
Cash Flo)
Interpretin# the 2tatement of Cash Flows
The statement of cash flows ties the )alance sheet at the )e#innin# of the period with the )alance sheet at the end of the period after considerin# the performance of the firm durin# the period throu#h the income statement.
 
*sing Microsoft +  %'cel
 
Financial management