th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt 1 1 Chapter The Field of Finance

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Chapter 1 – Outline Definition of Finance Short-Term vs. Long-Term Financing Decisions Risk-Return Trade-Off Financial vs. Real Capital Stocks vs. Bonds Forms of Organization

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Finance is closely related to Economics

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Economics provides a structure for decision making in areas such as –Risk analysis –Pricing theory –Comparative return analysis

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Economics gives us a broad picture of economic environment, which includes –Federal Reserve and banking system –Economic variables Gross Domestic Product Industrial Production Disposable Income Unemployment Inflation Interest rates Taxes

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Finance is closely related to Accounting Accounting provides the financial data we use

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt There are many careers in Finance Corporate finance officer Banker Stockbroker Financial analyst Portfolio manager Investment banker Financial consultant Personal financial planner

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Finance has evolved over time (next)

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Finance emerged at the turn of the century

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt 1930s—the depression caused finance to focus on –preservation of capital –maintenance of liquidity –Corporate reorganizations –Bankruptcy process

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Mid 1950s—finance became more analytical –Allocating financial capital (money) –For the purchase of real capital (long- term plant and equipment)

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Financial capital vs. Real capital Financial Capital (or Accounting Capital) = money Real Capital (or Economic Capital) = plant and equipment

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Recent Issues in Finance The risk-return relationship Capital structure theory (Merton and Miller) Effects of inflation and disinflation

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Trade-off Daily Credit management Inventory control Receipt and disburse- ment of funds Occasional Stock issue Bond issue Capital budgeting Dividend decision Profitability Risk Goal: Maximize shareholder wealth T 1-1 Figure 1-1 Functions of the Financial Manager— Page 8

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Forms of Organization Sole Proprietorship (largest in actual number but smallest in total sales revenue) Partnership Corporation (smallest in actual number but largest in total sales revenue)

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Goals of Financial Management (next several slides)

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Agency Theory—examines the relation between owners and managers of the firm.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Institutional Investors—own larger fractions of firms over time.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt The ultimate measure of performance is NOT what the firm earns, but how the earnings are valued by the investor.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt While many goals are possible, the official goal of the financial manager is TO MAXIMIZE SHAREHOLDER WEALTH.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt As investor attitudes and preferences change, managers must focus on different things to maximize shareholder wealth.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Here are reasons for management to maximize shareholder wealth. Poor stock price performance can lead to undesirable takeovers and proxy fights Management often has incentives such as stock and options. Powerful institutional investors force management to be responsible.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Social Responsibility and Ethical Behavior

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt In most cases, wealth maximization is consistent with social responsibility.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Sometimes, wealth maximization leads to socially undesirable results: Pollution Equitable hiring practices Insider trading

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt The Role of Financial Markets

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Financial markets are meeting places for people, corporations and institutions to lend or invest money.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Public financial markets—markets for national, state, and local governments.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Corporate financial markets—markets for businesses to raise money.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Short-Term vs. Long-Term Financing

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Working Capital is concerned with short- term (S/T) financing decisions <1 year (money markets) ex., managing cash and other current assets

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Capital Budgeting is concerned with long- term (L/T) financing decisions >1 year (capital markets) ex., purchasing a new machine in the future

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Primary Markets— Refers to the market when private individuals purchase securities from the corporation— corporations raise funds.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Secondary Markets—When investors trade among themselves.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Institutions force many types of restructuring. Changes in capital structure Selling lower-profit business entities. Removal of ineffective management. Mergers and acquisitions.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Internalization of the Financial Markets

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Increasingly, we are seeing the emergence of international trade.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Many companies are truly global companies today.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt Students should be aware of this trend and adjust their educations: Learn one or more foreign languages. Take courses in international business. Learn about other cultures and people. Look for work experience that teaches global business.

th 9 ©The McGraw-Hill Companies, Inc Foundations of Financial Management E D I T I O N N I N T H Irwin/McGraw-Hill Block Hirt THE END