1. Chapter 1 Introduction to Financial Management
Importance of finance
Forms of business organizations
Intrinsic values, stock prices, and executive compensation
Business ethics
Conflicts between managers, stockholders, and bondholders

2. What is Finance
Not too old – developed within economics – the pricing of financial assets – studies financial markets – Financial flows within firms

3. Areas of Finance Corporate finance: Capital Markets: Investments:
what assets to acquire
How to raise capital
How to run the firm to maximize value.
Capital Markets:
Relate to markets where stock and bond prices are determined.
Financial institutions.
Investments:
Security analysis
Portfolio theory
Market Analysis
Behavioral Finance
They are closely interconnected
Corporate: Buy a building or lease it? Take a loan or issue a stock?
CM: FI such as Banks, IB, insurance companies, mutual fund, etc..
Behavioral is interesting growing area in finance. We study the how psychology effects investor decisions. Hold on to losers….sell winners quickly..etc..
Banking is studied under capital markets, but a bank lending officer evaluating a business’ loan request must understand corporate finance to make a sound decision.
A corporate treasurer negotiating with a banker must understand banking if the treasurer is to borrow on “reasonable” terms.
A security analyst trying to determine a stock’s true value must understand corporate finance and capital markets to do his or her job.

4. Forms of Business Organization
Proprietorship
Partnership
Corporation
Limited liability companies (LLC or LLP)

5. Proprietorships and Partnerships
Proprietorship: An unincorporated business owned by one individual.
Partnership: An unincorporated business owned by two or more persons.
Advantages
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages
Difficult to raise capital
Unlimited liability
Limited life

6. Corporation
Corporation: a legal entity created by a state, and it is separate and distinct from its owners and managers.
Advantages
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages
Double taxation
Cost of setup and report filing
Firms usually start as proprietorships/partnerships and then become

7. Limited liability companies (LLC or LLP)
Limited liability companies: a relatively new type of organization that is a hybrid between a partnership and a corporation.
They have limited liability like corporations but are taxed like partnerships.

8. 1-partnership
2&3 limited partnership. Some partners are limited other have unlimited
4-Joined venture
5- corporation
6-LLC orLLP
7-proprietorship

9. Why most successful businesses organize as a corporation?
Limited liability reduces the risks faced by investors
Easier to attract capital
The liquidity of the corporations’ stocks

10. What is a stock Ownership in the firm
You expect to receive dividends + capital gains

11. Stock Prices and Shareholder Value
The primary financial goal of management is to..
maximize shareholder wealth, which translates to maximizing stock price.
How can management affect stock price?
Through their investment decisions which change expectations of the firm’s future
Is maximizing shareholder value inconsistent with being socially responsible
Explain shareholder value and how its maximization translates into stock price maximization – How does management affect stock price? Through their investment decisions which change expectations of the firm’s future – Therefore managers should make decisions that maximize the stock price

12. Determinants of Intrinsic Values and Stock Prices

13. Stock Prices and Intrinsic Value
In equilibrium, a stock’s price should equal its “true” or intrinsic value.
Intrinsic value is a long-run concept.
To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value.
Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run.

15. Should managers maximize the stock price then or the intrinsic value?
Should managers help investors improve their estimate’s of the firm’s intrinsic value?
Managers could maximize the stock price easily by giving investors and the market false expectations

16. Some Important Business Trends
Increased globalization of business
Improvement in information technology
More data and better decisions
Corporate Governance

17. Conflicts Between Managers and Stockholders
Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders).
But the following factors affect managerial behavior:
Managerial compensation packages
Direct intervention by shareholders
The threat of firing
The threat of takeover
Disney’s former president severance package of $140 million after 14 months on the job
Tyco’s CEO’s $1 million birthday party for his wife
Disney’s former CEO pay of $575 million

18. Conflicts Between Stockholders and Bondholders
Stockholders are more likely to prefer riskier projects, because they receive more of the upside if the project succeeds. By contrast, bondholders receive fixed payments and are more interested in limiting risk.
Bondholders are particularly concerned about the use of additional debt.
Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions.

19. What did we talk about 3 areas of finance
Forms of business organizations
Goal of management
Conflicts between managers and stockholders and bondholders