THE GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT Chapter

THE GOALS AND FUNCTIONS OF FINANCIAL MANAGEMENT (Chapter 1) z. Field of Finance: An Overview z. Goal of the Firm z. Agency Problem z. Business Ethics z. Forms of Business Organization z. Globalization z. Computerization

Field of Finance: An Overview

Financial Management (Insiders) z. Investment Decisions - Assets y. Using Funds z. Financing Decisions - Debt and Equity y. Acquiring Funds z. MGMT 133, MGMT 134, MGMT 174 z. MGMT 133 is oriented towards all business majors (not just finance majors)

Investments (Outsiders) z Security Analysis z Portfolio Management z MGMT 135 z MGMT 136

Financial Markets z Money and Capital Markets z Primary and Secondary Markets z Financial Institutions: Banks, Insurance Companies, Credit Unions, Mutual Funds, Etc. . z Federal Reserve: Interest Rates, Regulation z MGMT 137, ECON 135

Goal of the Firm z. Wealth Maximization y. Maximize the wealth of the firm’s existing common stockholders z. Wealth Defined y. Market Value of the firm’s common stock y(Price per share)(number of shares)

Goal of the Firm (Continued) z. Factors Affecting Price Per Share y. Earnings per share (EPS) y. Price/Earnings Ratio x. Timing of EPS x. Risk z. Problem With Earnings Maximization y. Ignores many of the important variables that impact on the stockholders’ well being (i. e. . , wealth)

Agency Problem z. Stockholders Versus Managers y. Managers, in light of their self interest, may at times make decisions that are not oriented towards maximizing stockholder wealth. This does not, however, invalidate the goal itself. y. Incentives for management to act in the stockholders’ best interest x. Threat of being fired - PERS is quite active x. Hostile takeover if stock price is too low x. Performance based salaries

Business Ethics z Ethics Defined y. Standards of conduct and moral judgment z Unethical conduct may be obvious at times. y. Insider Trading z Ethical dilemmas, however, can also exist. y. Profits and ethics sometimes conflict y. Often there is no clear-cut right or wrong answer

Forms of Business Organization z. Sole Proprietorship y. About 75% of all firms z. Partnership z. Corporation y. About 90% of all sales dollars

Sole Proprietorship z. A single owner z. Unlimited liability z. Taxed at personal income tax rates z. Easiest and least expensive to establish z. Market value of firm difficult to estimate z. Difficult to raise equity capital

Partnership z. Two or more owners z. Unlimited liability z. Taxed at personal income tax rates z. Not too costly to establish z. Market value of firm difficult to estimate z. Difficult to raise equity capital y. Easier to raise capital compared to a sole proprietorship, however.

Corporation (Publicly Traded) z. Unlimited life z. Legal entity z. Easy to transfer ownership z. Limited liability of stockholders z. Double taxation y. Corporate earnings taxed y. Stockholders’ dividends taxed z. Most attractive form for raising capital z. Market Value easy to determine

Hybrid Forms of Organization z. Limited partnership y. Liability limited to investment z. Subchapter S Corporation y. Shareholders enjoy limited liability, but income is taxed at personal income rates.

Globalization z Financial managers must have a multinational perspective regarding many decisions z Various international aspects of financial management will be introduced throughout the semester

Technology z Strong computer skills are essential z Internet and World Wide Web z Electronic Commerce