1. Finance and the Financial Manager

2. “Any legal economic activity to earn profit is called business.” Kinds of Business:  Manufacturing Business  Services Business  Trading Business

3.  Sole Proprietorship  Partnership  Joint Stock Company/Corporation

4. Types of Companies:  Public Limited Company  Private Limited Company

5.  Shareholders  Directors  Director  Nominee Director  Employee Director  Perpetual Succession  Limited Liability

6.  Articles of Incorporation  Purpose of Business  How many shares can be issued  No. of directors to be appointed  Separate Legal Entity  Resident of State

7. Company Sole Proprietorship/Business  Can Raise money by issuing shares & can purchase back those shares  Legal formalities  Ownership & Management is different  Double Taxation  Cannot issue shares  No legal formalities  Owner & Manager may be same person  Tax is paid on individual income only

8.  Legal Formalities  Double Taxation

9.  Real Assets “Assets used for the purpose of generating revenue.” Types of Real Assets: Tangible Assets Intangible Assets  Financial Assets

10. “Anyone responsible for significant investing or financing decisions.” Types of Decisions:  Investing/Capital Budgeting Decisions  Financing Decisions  Debt Financing  Equity Financing

11. Financial Markets (investors holding financial assets) Financial Markets (investors holding financial assets) Financial Manager Firm’s Operations (a bundle of real assets) Firm’s Operations (a bundle of real assets)

12. Chief Financial Officer (CFO) Responsible For:  Financial Policy  Corporate Planning Chief Financial Officer (CFO) Responsible For:  Financial Policy  Corporate Planning Treasurer Responsible For:  Cash Management  Raising Capital  Banking Relationships Treasurer Responsible For:  Cash Management  Raising Capital  Banking Relationships Controller Responsible For:  Preparing of Financial Statements  Accounting  Taxes Controller Responsible For:  Preparing of Financial Statements  Accounting  Taxes

13. Separation of Ownership from Management: Sole proprietorship = single owner /manager Corporations = ownership & management separate ADVANTAGES: Hire the professional managers DISADVANTAGES: Principal Agent Problem Principal Shareholders Agent Management

14. AGENCY COST : “When the management is not working according to shareholders interest they have to bear the cost.” This cost is incurred when:  Manager do not maximize the firm value  Shareholders incur the cost to monitor the manager & influence their action NO COST IS BEARED IN CASE OF SOLE PROPRIETORSHIP FINANCING also rises agency cost

15.  Banks  Shareholders  Investors  Company Workforce  Government

16. Overall value of the company as a pie Number of claimants Claimants Contract:  Written  Repayment date  Interest  Terms for additional investment Solution:  Information Asymmetries  Reassure the investor to invest

17. Profit maximization is not the only corporate goal:  Which year’s profit?  Cutting dividend and investing the cash.  Different accountants have different information to calculate profit.

18.  Principal-agent problem  Are managers maximize their own wealth?  Replace the board of directors  Threat of hostile takeover

19.  Is it desirable for managers to act in the selfish interest of their shareholders?  Conflict between doing well and doing good.  Ethical issues  Trusty and honest decisions  One party has more information than the others