Overview of Financial Management and the Financial Environment.ppt

Overview of Financial Management and the Financial Environment.ppt

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Overview of Financial Management and the Financial Environment

CHAPTER 1 Overview of Financial Management and the Financial Environment Financial management Forms of business organization Objective of the firm: Maximize wealth Determinants of stock pricing The financial environment Financial instruments, markets and institutions Interest rates and yield curves Why is corporate finance important to all managers? Corporate finance provides the skills managers need to: Identify and select the corporate strategies and individual projects that add value to their firm. Forecast the funding requirements of their company, and devise strategies for acquiring those funds. Sole proprietorship Partnership Corporation Advantages: Ease of formation Subject to few regulations No corporate income taxes Disadvantages: Limited life Unlimited liability Difficult to raise capital to support growth A partnership has roughly the same advantages and disadvantages as a sole proprietorship. Becoming a Corporation A corporation is a legal entity separate from its owners and managers. File papers of incorporation Charter Bylaws Advantages: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages: Double taxation Cost of set-up and report filing Becoming a Public Corporation and Growing Afterwards Initial Public Offering (IPO) of Stock Raises cash Allows founders and pre-IPO investors to “harvest” some of their wealth Subsequent issues of debt and equity Agency problem: managers may act in their own interests and not on behalf of owners (stockholders) The primary objective should be shareholder wealth maximization, which translates to maximizing stock price. Should firms behave ethically? YES! Do firms have any responsibilities to society at large? YES! Shareholders are also members of society. It is a company’s ability to generate cash flows now and in the future. What three aspects of cash flows affect an investment’s value? 1. Amount of expected cash flows (bigger is better) 2. Timing of the cash flow stream

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