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Chapter 1 - An Introduction to Financial Management

Chapter 1 - An Introduction to Financial Management.  2005, Pearson Prentice Hall. Goal of the Firm. 1) Profit Maximization? this goal ignores: a) TIMING of Returns (Time Value of Money - Ch. 5) b) UNCERTAINTY of Returns (Risk - Ch. 6). Goal of the Firm.

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Chapter 1 - An Introduction to Financial Management

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  1. Chapter 1 - An Introduction to Financial Management  2005, Pearson Prentice Hall

  2. Goal of the Firm 1) Profit Maximization? this goal ignores: a) TIMING of Returns (Time Value of Money - Ch. 5) b) UNCERTAINTY of Returns (Risk - Ch. 6)

  3. Goal of the Firm 2) Shareholder Wealth Maximization? this is the same as: a) Maximizing Firm Value b) Maximizing Stock Price

  4. Legal Forms of Business 1) Sole Proprietorship • A business owned by a single individual. • Owner maintains title to the firm’s assets. • Owner has unlimited liability. 2) Partnership • Similar to a sole proprietorship, except that there are two or more owners.

  5. Legal Forms of Business 2a) General Partnership • All partners have unlimited liability. 2b) Limited Partnership • Consists of one or more general partners, who have unlimited liability. • One or more limited partners (investors) whose liability is limited to the amount of their investment in the business.

  6. Legal Forms of Business 2c) Limited Liability Company (LLC) • Cross between a partnership and a corporation. • Owners have limited liability, but the firm runs and is taxed like a partnership.

  7. Legal Forms of Business 3) Corporation • A business entity that legally functions separate and apart from its owners. • Owners’ liability is limited to the amount of their investment in the firm. • Owners hold common stock certificates, and ownership can be transferred by selling the certificates.

  8. The Corporation and Financial Markets

  9. Corporation The Corporation and Financial Markets

  10. Corporation Investors The Corporation and Financial Markets

  11. Corporation Investors Government The Corporation and Financial Markets

  12. cash Corporation Investors Government The Corporation and Financial Markets

  13. cash Corporation Investors securities Government The Corporation and Financial Markets

  14. cash Corporation Investors securities Secondary markets Government The Corporation and Financial Markets

  15. cash Corporation Investors securities Secondary markets Government The Corporation and Financial Markets

  16. cash Corporation Investors securities Secondary markets Government The Corporation and Financial Markets

  17. cash Corporation Investors securities Secondary markets Cash flow Government The Corporation and Financial Markets

  18. cash Corporation Investors securities Secondary markets Cash flow tax Government The Corporation and Financial Markets

  19. cash Corporation Investors securities reinvest Secondary markets Cash flow tax Government The Corporation and Financial Markets

  20. cash Corporation Investors securities reinvest Secondary markets dividends, etc. Cash flow tax Government The Corporation and Financial Markets

  21. The Corporation and Financial Markets • Primary Market

  22. The Corporation and Financial Markets • Primary Market • Market in which new issues of a security are sold to initial buyers.

  23. The Corporation and Financial Markets • Primary Market • Market in which new issues of a security are sold to initial buyers. • Secondary Market

  24. The Corporation and Financial Markets • Primary Market • Market in which new issues of a security are sold to initial buyers. • Secondary Market • Market in which previously issued securities are traded.

  25. The Corporation and Financial Markets • Initial Public Offering (IPO)

  26. The Corporation and Financial Markets • Initial Public Offering (IPO) • The first time the firm’s stock is sold to the general public.

  27. The Corporation and Financial Markets • Initial Public Offering (IPO) • The first time the firm’s stock is sold to the general public. • Seasoned New Issue

  28. The Corporation and Financial Markets • Initial Public Offering (IPO) • The first time the firm’s stock is sold to the general public. • Seasoned New Issue • A new stock offering by a firm that already has stock that is traded in the secondary market.

  29. Financial Management Axioms 1) Risk - return trade-off. 2) Time value of money. 3) Cash - not profits - is king. 4) Incremental cash flows count. 5) The curse of competitive markets. 6) Efficient capital markets. 7) The agency problem. 8) Taxes bias business decisions. 9) All risk is not equal. 10) Ethical dilemmas are everywhere in finance.

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