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Chapter
McGraw-Hill/Irwin
Chapter Outline
Introduction to Finance Risk-Return Tradeoff Forms of Organizations Corporate Governance Goals of Financial Management Social Responsibility and Finance Role of Financial Markets
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Financial Management
Financial Management or business finance is concerned with managing an entitys money. For example, a company must decide:
where to invest its money. whether or not to replace an old asset. when to issue new stocks and bonds. whether or not to pay dividends.
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New financial products with a focus on hedging are being widely used.
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Risk-Return Trade-Off
Influences operational side (capital versus labor/ Product A versus Product B) Influences financial mix (stocks versus bonds versus retained earnings)
Stocks are more profitable but riskier. Savings accounts are less profitable and less risky (or safer)
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Sole Proprietorship
Represents single-person ownership Advantages:
Simplicity of decision-making. Low organizational and operational costs.
Drawback
Unlimited liability to the owner. Profits and losses are taxed as though they belong to the individual owner.
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Partnership
Similar to sole proprietorship except there are two or more owners.
Articles of partnership: Specifies ownership interest, the methods for distributing profits, and the means of withdrawing from the partnership. Limited partnership: One or more partners are designated as general partners and have unlimited liability of the debts of the firm; other partners designated limited partners and are liable only for their initial contribution.
Nokia Internal Use Only
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Corporation
Corporation
Articles of incorporation: Specify the rights and limitations of the entity. Its owned by shareholders who enjoy the privilege of limited liability. Has a continual life.
Key feature is the easy divisibility of ownership interest by issuing shares of stock.
Nokia Internal Use Only
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Corporation (contd)
Disadvantage:
The potential of double taxation of earnings.
Subchapter S corporation: Income is taxed as a direct income to stockholders and thus is taxed only once as normal income.
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Corporate Governance
Agency theory
Examines the relationship between the owners and managers of the firm.
Institutional investors
Have more to say about the way publicly owned companies are managed. Public Company Accounting Oversight Board (PCAOB)
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Major focus is to make sure that publiclytraded corporations accurately present their assets, liabilities, and equity and income on their financial statements.
Nokia Internal Use Only
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Social Responsibility
Adoption of policies that maximize values in the market attracts capital, provides employment and offers benefits to the society. Certain cost-increasing activities may have to be mandatory rather than voluntary initially, to ensure burden falls equally over all business firms.
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Ethical Behavior
Ethical behavior creates invaluable reputation. Insider trading Protected against by the Securities and Exchange Commission (SEC).
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Capital markets
Long-term markets Securities include common stock, preferred stock and corporate and government bonds.
Nokia Internal Use Only
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Allocation of Capital
Primary market
When a corporation uses the financial markets to raise new funds, the sale of securities is made by way of a new issue.
Secondary market
When the securities are sold to the public (institutions and individuals). Financial managers are given a feedback about their firms performance.
Nokia Internal Use Only
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Restructuring
Restructuring can result in:
Changes in the capital structure (liabilities and equity on the balance sheet). Selling of low-profit-margin divisions with the proceeds of the sale reinvested in better investment opportunities. Removal or large reductions in the of current management team.
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