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Ch. 1 - An Introduction to

Financial Management

2002, Prentice Hall, Inc.

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What is Finance?

Perspective of Finance

Past Financial Statement Analyses

Present Short-Term Financial Management

Future Capital Budgeting

Goals of the Firm

Ten Basic Principles of Finance

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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)

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Legal Forms of Business1) Sole Proprietorship

A business owned by a single individual.

Owner maintains title to the firms assets.

Owner has unlimited liability.

2) Partnership

Similar to a sole proprietorship, except

that there are two or more owners.

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2a) General Partnership

All partners have unlimited liability.

2b) Limited Partnership

Consists of one or more general partners,

who have unlimited liability, and

One or more limited partners (investors)

whose liability is limited to the amount of

their investment in the business.

Legal Forms of Business

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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.

Legal Forms of Business

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The Corporation and Financial

Markets

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The Corporation and Financial

Markets

Corporation

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The Corporation and Financial

Markets

Corporation Investors

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The Corporation and Financial

Markets

Government

Corporation Investors

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The Corporation and Financial

Markets

cash

Government

Corporation Investors

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The Corporation and Financial

Markets

cash

Government

securities

Corporation Investors

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The Corporation and Financial

Markets

Government

cash

securities

Corporation Investors

Secondary

markets

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The Corporation and Financial

Markets

Government

cash

securities

Corporation Investors

Secondary

markets

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The Corporation and Financial

Markets

Government

cash

securities

Corporation Investors

Secondary

markets

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The Corporation and Financial

Markets

cashInvestors

Secondary

markets

Government

securities

Cash flow

Corporation

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The Corporation and Financial

Markets

cashInvestors

Secondary

markets

Government

securities

Cash flow

tax

Corporation

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The Corporation and Financial

Markets

cashInvestors

Secondary

markets

Government

securities

Cash flow

reinvest

tax

Corporation

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The Corporation and Financial

Markets

cashInvestors

Secondary

markets

Government

Debt & equity

securities

Cash flow

reinvest

tax

Corporation

Interest,

dividends,

etc.

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BUSINESS

INVESTMENT

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The Corporation and Financial

Markets

Primary Market

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Primary Market

Market in which new issues of a

security are sold to initial buyers.

The Corporation and Financial

Markets

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Primary Market

Market in which new issues of a

security are sold to initial buyers.

Secondary Market

The Corporation and Financial

Markets

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Initial Public Offering (IPO)

The Corporation and Financial

Markets

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Initial Public Offering (IPO)

The first time the firms stock is

sold to the general public.

Seasoned New Issue

The Corporation and Financial

Markets

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Initial Public Offering (IPO)

The first time the firms stock is

sold to the general public.

Seasoned New Issue

A new stock offering by a firm that

already has stock that is traded inthe secondary market.

The Corporation and Financial

Markets

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FINANCIAL MARKETS, INSTITUITION &INSTRUMENTS

Primary Markets

Secondary Markets

Money Markets

o T-Billso Federal Agency Discount Noteso Short Term Muniso Federal Fundso Negotiable Certificate of Deposits

o Commercial Papero Bankers Acceptanceo Repos

Mortgage Markets

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FINANCIAL MARKETS, INSTITUITION &INSTRUMENTS

Capital Marketso Debto Equity

o Common Shareso Preferred Shares

Bond Marketso T-Bondso Agency Debto Munis Bondso Corporate Bonds

Futures Market, i.e., real or financial assetso Optionso Forwardso Derivatives

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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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BUSINESS

INVESTMENT

ASSETS FINANCE

S/T INV + L/T INV S/T FINANCE + L/T FINANCE

C A + F A = C L + LTD + EQUITY

Cash Plant & Equipment Short Term Loan Long Term PreferredMarketable Securities Current Maturities Debt Share

Machinery Accounts Payable Bank Loans Ordinary ShareAccounts Receivables Capital WIP Notes Share Premium

Notes Treasury StockInventory Land Accrued Expenses Bonds Retained EarningsOthers Investments (Land) Proposed Dividend Reserves

S/T= SHORT TERM, L/T=LONG TERM, INV= INVESTMENT

CA= CURRENT ASSETS, FA= FIXED ASSETS, CL= CURRENT LIABILITY CM= CURRENT MATURITY WIP= WORK IN PROGRESS