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Explore the role of financial managers and the basics of corporate finance, including long-term investment decisions, financing strategies, and working capital management.
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What is corporate finance? What is the role of the financial manager in the corporation? • What is the goal of financial manager?
1.1 Corporate finance and financial manager • What is corporate finance? Financial manager should answer these question: • What long-term investment should you take? (line of business, sort of building, machinery and equipment). • Where will you get the long-term financing to pay for your investment? (from owners or borrow money). • How will you manage your everyday financial activities such as collecting from customer and paying suppliers? Corporate finance: is the study of ways to answer these three questions.
The financial manager: • Owners (the stockholders) are usually not directly involved in making business decision, particularly on a day-to-sat basis. • The corporate employs managers to represent the owners’ interests and make decision on their behalf. • The financial management function is usually associated with a top officer of the firm, such as a vice president of finance or some other chief financial officer (CFO).
Financial manager decision: • Capital budgeting: the process of planning and managing a firm’s long-term investment. Financial managers tries to identify investment opportunities that are wealth more to the firm than they cost to acquire. • Capital structure: (or financial structure) is the specific mixture of long-term debt and equity the firm uses to finance its operations. The financial managers has two concern in this area: first, how much should the firm borrow? The mixture chosen will affect both the risk and the value of the firm. Second, what percentage of the firm’s cash flow goes to creditor and what percentage goes to the shareholder? • Working capital management: the term working capital refer to a firm’s short-term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers. Managing the firm’s working capital is day-to-day activity.
1.2 forms of business organization • There are three different legal forms of business organization: • sole proprietorship. • Partnership. • corporation.
Sole proprietorship: is a business owned by one person. The Advantage: • Easiest to start • Least regulated • Single owner keeps all the profits • Taxed once as personal income The Disadvantage: • Limited to life of owner • Equity capital limited to owner’s personal wealth • Unlimited liability • Difficult to sell ownership interest
Partnership: is similar to a proprietorship except that there are two or more owners (partners). In general, all partners share gains or losses, and have unlimited liability for all partnership debt. The ways partnership gains and losses are divided is described in partnership agreement (it can be oral or formal) The advantage : • Two or more owners • More capital available • Relatively easy to start • Income taxed once as personal income The disadvantage: • Unlimited liability • General partnership • Limited partnership • Partnership dissolves when one partner dies or wishes to sell • Difficult to transfer ownership
Corporation: is the most important form (in term of size) of business organization in united state. A corporation is a business created as distinct legal entity composed of one or more individual or entities, and it has many of rights, duties,, and privileges of an actual person. • The Advantages • Limited liability • Unlimited life • Separation of ownership and management • Transfer of ownership is easy • Easier to raise capital • The Disadvantages • Separation of ownership and management • Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)
1.3 The goal of financial management • Possible goal Survive. Avoid financial distress and bankruptcy. Beat the competition. Maximize sale and market share. Minimize costs. Maximize profits. Maintain steady earning growth. • The goal of financial management To maximize the current value per share of the existing stock.
review • Which one of the following terms is defined as the management of a firm's long-term investments? A. working capital managementB. financial allocationC. agency cost analysisD. capital budgetingE. capital structure • Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. working capital managementB. cash managementC. cost analysisD. capital budgetingE. capital structure
review • A business created as a distinct legal entity and treated as a legal "person" is called a: A. corporation.B. sole proprietorship.C. general partnership.D. limited partnership.E. unlimited liability company. • A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. generally partner.B. sole proprietor.C. limited partner.D. corporate shareholder.E. zero partner.
