THE GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT (Chapter 1)

1. THE GOALS AND FUNCTIONS OFFINANCIAL MANAGEMENT (Chapter 1) • Field of Finance: An Overview • Goal of the Firm • Agency Problem • Business Ethics • Forms of Business Organization • Globalization • Computerization

2. Field of Finance: An Overview

3. Financial Management (Insiders) • Investment Decisions - Assets • Using Funds • Financing Decisions - Debt and Equity • Acquiring Funds • MGMT 133, MGMT 134, MGMT 174 • MGMT 133 is oriented towards all business majors (not just finance majors)

4. Security Analysis Portfolio Management MGMT 135 MGMT 136 Investments (Outsiders)

5. Financial Markets • Money and Capital Markets • Primary and Secondary Markets • Financial Institutions: Banks, Insurance Companies, Credit Unions, Mutual Funds, Etc.. • Federal Reserve: Interest Rates, Regulation • MGMT 137, ECON 135

6. Goal of the Firm • Wealth Maximization • Maximize the wealth of the firm’s existing common stockholders • Wealth Defined • Market Value of the firm’s common stock • (Price per share)(number of shares)

7. Goal of the Firm (Continued) • Factors Affecting Price Per Share • Earnings per share (EPS) • Price/Earnings Ratio • Timing of EPS • Risk • Problem With Earnings Maximization • Ignores many of the important variables that impact on the stockholders’ well being (i.e.., wealth)

8. Agency Problem • Stockholders Versus Managers • Managers, in light of their self interest, may at times make decisions that are not oriented towards maximizing stockholder wealth. This does not, however, invalidate the goal itself. • Incentives for management to act in the stockholders’ best interest • Threat of being fired - PERS is quite active • Hostile takeover if stock price is too low • Performance based salaries

9. Business Ethics • Ethics Defined • Standards of conduct and moral judgment • Unethical conduct may be obvious at times. • Insider Trading • Ethical dilemmas, however, can also exist. • Profits and ethics sometimes conflict • Often there is no clear-cut right or wrong answer

10. Forms of Business Organization • Sole Proprietorship • About 75% of all firms • Partnership • Corporation • About 90% of all sales dollars

11. Sole Proprietorship • A single owner • Unlimited liability • Taxed at personal income tax rates • Easiest and least expensive to establish • Market value of firm difficult to estimate • Difficult to raise equity capital

12. Partnership • Two or more owners • Unlimited liability • Taxed at personal income tax rates • Not too costly to establish • Market value of firm difficult to estimate • Difficult to raise equity capital • Easier to raise capital compared to a sole proprietorship, however.

13. Corporation (Publicly Traded) • Unlimited life • Legal entity • Easy to transfer ownership • Limited liability of stockholders • Double taxation • Corporate earnings taxed • Stockholders’ dividends taxed • Most attractive form for raising capital • Market Value easy to determine

14. Hybrid Forms of Organization • Limited partnership • Liability limited to investment • Subchapter S Corporation • Shareholders enjoy limited liability, but income is taxed at personal income rates.

15. Globalization • Financial managers must have a multinational perspective regarding many decisions • Various international aspects of financial management will be introduced throughout the semester

16. Technology • Strong computer skills are essential • Internet and World Wide Web • Electronic Commerce