Finance Chapter 1: Introduction to Financial Management

Why Study Finance??

Marketing, Accounting, Management, and YOUR personal life require to know finance.

the total value of the stock in a corporation is simply equal to the value of the owner's equity.

Maximize the market value of the existing owner's equity.

appropriate goal for the financial manager in a corporation can be stated easily...

The goal of financial management is to maximize the current value per share of the existing stock.

Corporation

a business created as a distinct legal entity owned by one or more individuals or entities.

Partnership

a business formed by two or more individuals or entities. *general partnership: all partners share gains or losses, all have unlimited liability *limited partnership: one or more general partners will run business w/ unlimited liability, but will be 1 or more limited partners who do not participate actively in business affairs.

Sole Proprietorship

a business owned by a single individual. (most common, keeps all profits, owner has unlimited liability for debts.)

Working Capital

a firm's short-term assets and liabilities. (inventory and short-term liabilities) (1) how much cash and inventory should we keep on hand? 2) should we sell on credit to our customers? 3) how will we obtain any needed short-term financing?)

Financial Institutions

businesses that deal primarily with financial matters. (banks and insurance companies)

2 types of Secondary Markets

dealer market: dealers buy and sell for themselves, at their own risk. auction market: has a physical location, in dealer, buying and selling is done by them, auction barely uses a dealer.

Investments

deals with financial assets such as stocks and bonds. Stockbrokers, Portfolio Managers, and Security Analysts are common career opportunities regarding investments. (these jobs pay well but are high stress)

International Finance

international aspects of either corporate finance investments, or financial institutions.

Sarbanes-Oxley Act

known as "Sarbox", intended to strengthen protection against corporate accounting fraud and financial malpractice.

Primary vs. Secondary Markets

primary: the original sale of securities by governments and corporations. secondary: markets in which securities are bought and sold after the original sale.

Primary Market- 2 types of primary market transactions

public offerings: selling securities to the general public private placement: negotiated sale involving a specific buyer.

Stakeholder

someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm. (can be employees, customers, suppliers, and even government.)

proxy fight

the mechanism by which unhappy stockholders can act to replace existing management.

Capital Structure

the mixture of debt and equity maintained by a firm. Financial Manager has 2 concerns in this area: 1) How much should the firm borrow? 2) What are the least expensive sources of funds for the firm? (know how and where to raise the money,Choosing among loan types is another job handled by financial mgr.)

Agency Problem

the possibility of conflict of interest between the owners and management of a firm.

Capital Budgeting

the process of planning and managing a firm's long-term investments. Evaluating the size, timing, and risk of future cash flows is the essence of capital budgeting.

Corporate Finance

this is main subject of the book, will get into more detail later.

The 4 basic areas of Finance

1. Corporate Finance 2. Investments 3. Financial Institutions 4. International Finance

To begin study of Financial Management we address two issues:

1: what is corporate, or business finance, and what is the role of the financial manager? 2: what is the goal of financial management?

the Financial Manager must be concerned with 3 questions

1st: Capital Budgeting 2nd: Capital Structure-how the firm obtains the financing it needs to support its long term investments. 3rd: Working Capital