FINANCIAL MANAGEMENT

FINANCE AND FINANCIAL MARKETS: CHAPTER 1

1.1 FINANCE
 vs Economics and Accounting

within an Organization
FINANCE
Corporate Finance, Capital

Markets and Investments

FINANCE vs ECONOMICS AND ACCOUNTING

FINANCE ECONOMICS ACCOUNTING

A term for matters It is the branch of It refers to the

regarding the knowledge process of
management, concerned with the summarizing,
creation, and study production, analyzing and
of money, consumption and reporting these
investments and transfer of wealth. transactions to
other financial oversight agencies,
investments. regulators and tax
collection entities.
Corporate Finance, Capital Markets and Investments

Corporate Finance Capital Markets Investments

Focuses on decisions The markets where Relate to decisions

relating to how much interest rates, along concerning stocks
and what types of with stock and bond and bonds and
assets to acquire, how prices, are include a number of
to raise the capital determined. activities such as
needed to buy assets, the security
and how to run the analysis, portfolio
firm so as to theory and market
maximize its value. analysis.
1.2 JOBS IN FINANCE
 FORMS OF BUSINESS
1.3 ORGANIZATIONS
 FORMS OF BUSINESS ORGANIZATIONS

1.3

Sole proprietorship is an unincorporated

business owned by one individual.
CORPORATIONS
Partnership is an unicorporated business
owned by two or more persons.
SOLE PROPRIETORSHIP
Corporations is a legal entity created by
PARTNERSHIP a state, separate and distinct from its
owners and managers, having unlimited
life, easy transferability of ownership
and limited liability.
LIMITED LIABILITY
COMPANIES AND
PARTNERSHIPS (LLCs and
LLPs)
 FORMS OF BUSINESS ORGANIZATIONS

1.3

Limited Liability Company is a relatively

new type of organization that is a
CORPORATIONS hybrid between a partnership and a
corporation.
SOLE PROPRIETORSHIP
Limited Liability Partnership is similar
to an LLC but used for professional
PARTNERSHIP firms in the fields of accounting, law
and architecture. It has limited liability
like corporations but is taxed like
partnerships.
LIMITED LIABILITY
COMPANIES AND
PARTNERSHIPS (LLCs and
LLPs)
FORMS OF BUSINESS ORGANIZATIONS

CORPORATIONS

S Corporations

C Corporations
 STOCK PRICES AND
1.4 SHAREHOLDER VALUE
STOCK PRICES AND SHAREHOLDER VALUE

Shareholder Wealth
Maximization

The primary goal for

managers of publicly
owned companies implies
that decisions should be
made to maximize the
long-run value of the
firm’s common stock.
STOCK PRICES AND SHAREHOLDER VALUE

Shareholder Wealth= no. of shares outstanding x market price per share

 INTRINSIC VALUES AND
STOCK PRICES AND
1.5 EXECUTIVE COMPENSATION
 Intrinsic Value

An estimate of a stock’s
“true” value based on
accurate risk and return
data. The intrinsic value
can be estimated but not
measured precisely.

Market Price

The stock value based on

perceived but possibly
incorrect information as
seen by the marginal
investor.
 Marginal Investor

An investor whose views

determine the actual stock
price.

Equilibrium

The situation in which the

actual market price equals
the intrinsic value, so
investors are indifferent
between buying or selling
a stock.
 INTRINSIC VALUES, STOCK PRICES AND EXECUTIVE COMPENSATION

Indeed, estimating intrinsic values is what

security analysis is all about and is what
distinguishes successful from unsuccessful
investors.
 INTRINSIC VALUES, STOCK PRICES AND EXECUTIVE COMPENSATION

Management’s goal should be to take

actions designed to maximize the firm’s
intrinsic value, not its current market price.
INTRINSIC VALUES, STOCK PRICES AND EXECUTIVE COMPENSATION
 IMPORTANT BUSINESS
1.6 TRENDS
 IMPORTANT BUSINESS TRENDS

Profound changes in
business practices
1 Relates to the way the
top managers operate and

4 interface with stockholders

Increased globalization of 2
business
3 Improvements in
Information Technology
1.7 BUSINESS ETHICS
BUSINESS ETHICS

How should Employees Deal with Unethical

c Behavior

b Consequences of Unethical Behavior

a What Companies are Doing

 CONFLICTS BETWEEN
MANAGERS,
1.8 STOCKHOLDERS AND
BONDHOLDERS
 CONFLICTS BETWEEN MANAGERS, STOCKHOLDERS AND
BONDHOLDERS

MANAGERS STOCKHOLDERS

VS VS

STOCKHOLDERS BONDHOLDERS
 END OF CHAPTER 1
FINANCE AND FINANCIAL MARKETS