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Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 0 Chapter 1 Introduction to Financial Management

1-1 1 Goal Of Financial Management What should be the goal of a corporation? –Maximize profit? –Minimize costs? –Maximize market share? –Maximize the current value of the company’s stock? Does this mean we should do anything and everything to maximize owner wealth? Sarbanes-Oxley Act

1-2 2 The Agency Problem Agency relationship –Principal hires an agent to represent its interests –Stockholders (principals) hire managers (agents) to run the company Agency problem –Conflict of interest between principal and agent Management goals and agency costs

1-3 3 Managing Managers Managerial compensation –Incentives can be used to align management and stockholder interests –The incentives need to be structured carefully to make sure that they achieve their goal Corporate control –The threat of a takeover may result in better management Other stakeholders

1-4 4 Example: Work the Web The Internet provides a wealth of information about individual companies One excellent site is finance.yahoo.com Click on the Web surfer to go to the site, choose a company and see what information you can find!

1-5 5 Figure 1.2

1-6 6 Financial Markets Cash flows to the firm Primary vs. secondary markets –Dealer vs. auction markets –Listed vs. over-the-counter securities NYSE NASDAQ

1-7 7 Quick Quiz What are the four basic areas of finance? What are the three types of financial management decisions, and what questions are they designed to answer? What are the three major forms of business organization? What is the goal of financial management? What are agency problems, and why do they exist within a corporation?