Ch. 1: Introduction to Financial Management

1. Ch. 1: Introduction toFinancial Management • Contents • What is Finance? • Forms of Business Organization • Business Goals • The Agency Problem • Market Incentives & Undesirable Behavior • Financial Markets

2. What is Finance?

3. Forms of Business Organization • Sole Proprietorship • Partnership • Corporation (C Corporation) • Hybrids • Limited Partnership • Limited Liability Company • Professional Corporation • S Corporation

4. Sole Proprietorship/ Partnership • About 80% of businesses are sole prop.s • Advantages • easy to form • subject to few regulations • no corporate income taxes • Disadvantages • limited life • unlimited liability • difficult to transfer ownership in partnership • can be difficult to raise capital

5. Corporation • About 80% of $ sales are by corporations • Advantages • Disadvantages

6. Limited Liability Company • hybrid between partnership & corporation • has limited liability • easy to form • avoids corporate income tax • but!

7. Business Goals ?? “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776, p. 14 in Modern Library 1937 edition)

8. The Agency Problem

9. Market Incentives & Undesirable Behavior • Relate Agency Problem to Ethics p. 14 • Expected Costs of Undesirable Behavior • probability of detection • level of sanctions • publicity • market assessment • Expected Benefits of Undesirable Behavior

10. Financial Markets • Primary, Secondary • Raising cash, increasing liquidity • Auction, Over-the-Counter (OTC)