Chapter 1

1. Chapter 1 Finance and the Financial Manager

2. Business “Any legal economic activity to earn profit is called business.” Kinds of Business: • Manufacturing Business • Services Business • Trading Business

3. Forms of Business • Sole Proprietorship • Partnership • Joint Stock Company/Corporation

4. Corporation Types of Companies: • Public Limited Company • Private Limited Company

5. Public Limited Company • Shareholders • Directors • Director • Nominee Director • Employee Director • Perpetual Succession • Limited Liability

6. Public Limited Company • Articles of Incorporation • Purpose of Business • How many shares can be issued • No. of directors to be appointed • Separate Legal Entity • Resident of State

7. Difference Between Company & Sole Proprietorship/Partnership • Can Raise money by issuing shares & can purchase back those shares • Legal formalities • Ownership & Management is different • Double Taxation • Cannot issue shares • No legal formalities • Owner & Manager may be same person • Tax is paid on individual income only Company Sole Proprietorship/Business

8. Disadvantages • Legal Formalities • Double Taxation

9. Assets • Real Assets “Assets used for the purpose of generating revenue.” Types of Real Assets: • Tangible Assets • Intangible Assets • Financial Assets

10. Financial Manager “Anyone responsible for significant investing or financing decisions.” Types of Decisions: • Investing/Capital Budgeting Decisions • Financing Decisions • Debt Financing • Equity Financing

11. Cash Flow from Investor to Firm & Vice Versa Firm’s Operations (a bundle of real assets) Financial Markets (investors holding financial assets) Financial Manager

12. Chief Financial Officer (CFO) • Responsible For: • Financial Policy • Corporate Planning • Treasurer • Responsible For: • Cash Management • Raising Capital • Banking Relationships • Controller • Responsible For: • Preparing of Financial Statements • Accounting • Taxes

13. Separation of Ownership from Management: Sole proprietorship = single owner /manager Corporations = ownership & management separate ADVANTAGES: Hire the professional managers DISADVANTAGES: Principal Agent Problem Principal Shareholders Agent Management

14. AGENCY COST : • “When the management is not working according to shareholders interest they have to bear the cost.” • This cost is incurred when: • Manager do not maximize the firm value • Shareholders incur the cost to monitor the manager & influence their action • NO COST IS BEARED IN CASE OF SOLE PROPRIETORSHIP • FINANCING also rises agency cost

15. Claimants • Banks • Shareholders • Investors • Company Workforce • Government

16. Overall value of the company as a pie • Number of claimants • Claimants Contract: • Written • Repayment date • Interest • Terms for additional investment • Solution: • Information Asymmetries • Reassure the investor to invest

17. Other Corporate Goals Profit maximization is not the only corporate goal: • Which year’s profit? • Cutting dividend and investing the cash. • Different accountants have different information to calculate profit.

18. Do Managers really look after the Interest of Shareholders? • Principal-agent problem • Aremanagers maximize their own wealth? • Replace the board of directors • Threat of hostile takeover

19. Should Managers look after the Interest of Shareholders? • Is it desirable for managers to act in the selfish interest of their shareholders? • Conflict between doing well and doing good. • Ethical issues • Trusty and honest decisions • One party has more information than the others