Ya Dije

Chapter 1
The Role of Managerial Finance

Learning Goals
LG1 Define finance and the managerial finance function. LG2 Describe the legal forms of business organization. LG3 Describe the goal of the firm, and explain why maximizing the value of the firm is an appropriate goal for a business.

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Learning Goals (cont.)
LG4 Describe how the managerial finance function is related toeconomics and accounting. LG5 Identify the primary activities of the financial manager. LG6 Describe the nature of the principle-agent relationship between the owners and managers of a corporation, and explain how various corporate governance mechanisms attempt to manage agency problems.
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What is Finance?
• Finance can be defined as the science and art of managing money. • At the personallevel, finance is concerned with individuals’ decisions about how much of their earnings they spend, how much they save, and how they invest their savings. • In a business context, finance involves the same types of decisions: how firms raise money from investors, how firms invest money in an attempt to earn a profit, and how they decide whether to reinvest profits in the business or distribute themback to investors.
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Career Opportunities in Finance: Financial Services
• Financial Services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments.

• Career opportunities include banking, personal financial planning, investments, real estate, and insurance.

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Career Opportunities in Finance:Managerial Finance
• Managerial finance is concerned with the duties of the financial manager working in a business. • Financial managers administer the financial affairs of all types of businesses—private and public, large and small, profit-seeking and not-for-profit. • They perform such varied tasks as developing a financial plan or budget, extending credit to customers, evaluating proposed largeexpenditures, and raising money to fund the firm’s operations.
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Career Opportunities in Finance: Managerial Finance (cont.)
• The recent global financial crisis and subsequent responses by governmental regulators, increased global competition, and rapid technological change also increase the importance and complexity of the financial manager’s duties. • Increasing globalization hasincreased demand for financial experts who can manage cash flows in different currencies and protect against the risks that naturally arise from international transactions.

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Legal Forms of Business Organization
• A sole proprietorship is a business owned by one person and operated for his or her own profit. • A partnership is a business owned by two or more people and operated for profit. •A corporation is an entity created by law. Corporations have the legal powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name.

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Table 1.1 Strengths and Weaknesses of the Common Legal Forms of Business Organization

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Matter of Fact

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Figure 1.1 Corporate Organization

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Table 1.2 CareerOpportunities in Managerial Finance

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Goal of the Firm: Maximize Shareholder Wealth
Decision rule for managers: only take actions that are expected to increase the share price.

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Goal of the Firm: Maximize Profit?
Which Investment is Preferred?

Profit maximization may not lead to the highest possible share price for at least three reasons:
1. 2. Timing is important—the receiptof funds sooner rather than later is preferred Profits do not necessarily result in cash flows available to stockholders

3.

Profit maximization fails to account for risk
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Goal of the Firm: What About Stakeholders?
• Stakeholders are groups such as employees, customers, suppliers, creditors, owners, and others who have a direct economic link to the firm.

• A firm with a...