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Transcript of 1 - 0 Fundamentals of Financial Management Ninth Edition Copyright © 2001 by Harcourt, Inc. All...
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Fundamentals of Financial ManagementNinth Edition
Copyright © 2001 by Harcourt, Inc.
All rights reserved.
Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.
ISBN 0-03-031478-X
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Career opportunities
Issues of the new millennium
Forms of business organization
Goals of the corporation
Agency relationships
CHAPTER 1An Overview of Financial Management
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Money and capital markets
Investments
Financial management
Career Opportunities in Finance
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Use of computers and electronic transfers of information
The globalization of business
Financial ManagementIssues of the new millennium
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3M 51.7 26.9Chase Manhattan 27.8 26.6Coca-Cola 62.3 64.6Exxon 80.1 65.1General Electric 23.9 31.1General Motors 30.8 68.0IBM 56.8 68.9McDonald’s 60.8 71.7Merck 24.9 27.4Walt Disney 16.7 18.9
Percentage of Revenue and Net Income from Overseas Operations for
10 Well-Known Corporations, 1998Percentage of Percentage of
Revenue Originated Net IncomeCompany Overseas Generated Overseas
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Forecasting and planning
Investment and financing decisions
Coordination and control
Transactions in the financial markets
Managing risk
Responsibilities of the Financial Staff
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Sole proprietorship
Partnership
Corporation
Alternative Forms of Business Organization
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Advantages:Ease of formationSubject to few regulationsNo corporate income taxes
Disadvantages:Limited lifeUnlimited liabilityDifficult to raise capital
Sole Proprietorship
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A partnership has roughly the same advantages and disadvantages as a sole proprietorship.
Partnership
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Advantages:Unlimited lifeEasy transfer of ownershipLimited liabilityEase of raising capital
Disadvantages:Double taxationCost of set-up and report filing
Corporation
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The primary goal is shareholder wealth maximization, which translates to maximizing stock price.Do firms have any responsibilities
to society at large?Is stock price maximization good or
bad for society?Should firms behave ethically?
Goals of the Corporation
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An agency relationship exists whenever a principal hires an agent to act on their behalf.
Within a corporation, agency relationships exist between:
Shareholders and managers
Shareholders and creditors
Agency Relationships
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Managers are naturally inclined to act in their own best interests.
But the following factors affect managerial behavior:Managerial compensation plansDirect intervention by shareholdersThe threat of firingThe threat of takeover
Shareholders versus Managers
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Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors.
In the long run, such actions will raise the cost of debt and ultimately lower stock price.
Shareholders versus Creditors
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Projected cash flows to shareholders
Timing of the cash flow stream
Riskiness of the cash flows
Factors that Affect Stock Price
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Factors that Affect the Level and Riskiness of Cash Flows
Decisions made by financial managers:Investment decisionsFinancing decisions (the relative
use of debt financing)Dividend policy decisions
The external environment