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Financial Mangament:
acquisition,
financing,and
management of assets.
Finance Decisions :
firms have
relatively large
amounts of debt,
whereas others are
almost debt free
(100% equity).
three decisions.
1.Investment Decision: The investment decision is the most
important of the firms three major decisions when it comes to value
creation. It begins with a determination of the total amount of assets
needed to be held by the firm. Picture the firms balance sheet in your
mind for a moment.
The financial manager needs to determine the dollar amount that
appears above the double lines on the left-hand side of the balance
sheet that is, the size of the firm. Even when this number is known,
the composition of the assets must still be decided. For example, how
much of the firms total assets should be devoted to cash or to
inventory?
Asset Management
Decisions : assets
must still be
managed efficiently.
The financial
manager is charged
with varying degrees
of operating
responsibility over
existing assets.
Reading 2
Financial Environment
Learning Goals
The Business Environment.
The Financial Environment.
Allocations Funds (External
Sources).
Sole Proprietorships: A
business form one owner.
Has unlimited liability for
all debts.
Advantages
Simplicity
Low setup cost
Quick setup
Single tax filing on individual form
Partnerships: A business
form two or more
individuals act as owners.
Two types: General and
Limited.
Disadvantages
Unlimited liability
Hard to raise additional capital
Transfer of ownership difficulties
Advantages
Can be simple
Low setup cost, higher than sole
proprietorship
Relatively quick setup
Limited liability for limited partners
Disadvantages
Unlimited liability for the general
partner
Difficult to raise additional capital, but
easier than sole proprietorship
Transfer of ownership difficulties
Corporations: A business
form legally separate
from its owners.
Disadvantages
Double taxation
More difficult to establish
More expensive to set up and maintain
2.3 Allocation of Funds: Funds will flow to economic units that are willing to
provide the greatest expected return (holding risk constant).
In a rational world, only those economic units with the most promising investment
opportunities will offer the highest expected returns.
Result: Savings tend to be allocated to the most efficient uses.
Risk-Expected Return Profile
2.4 Firms that require funds from external sources can obtain them in three
ways:
through a financial institution
through financial markets
through private placements
2.4.1 Financial institutions are intermediaries that channel the
savings of individuals, businesses, and governments into loans or
investments. The key suppliers and demanders of funds are
individuals, businesses, and governments. In general, individuals
are net suppliers of funds, while businesses and governments are
net demanders of funds.
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The capital market is a market that enables suppliers and demanders of long-term
funds to make transactions.
The key capital market securities are bonds (long-term debt) and both common
and preferred stock (equity, or ownership).
Bonds are long-term debt instruments used by businesses and government to raise
large sums of money, generally from a diverse group of lenders.
Common stock are units of ownership interest or equity in a corporation.
Preferred stock is a special form of ownership that has features of both a bond and
common stock.
Broker markets are securities exchanges on which the two sides of a transaction,
the buyer and seller, are brought together to trade securities.
Dealer markets are markets in which the buyer and seller are not brought together
directly but instead have their orders executed by securities dealers that make
markets in the given security.
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