1. CHAPTER 1 The Role and Environment of Managerial Finance

2. Learning Goals
1. Define finance, the major areas of finance, and Identify the primary activities of the financial manager within the firm.
2. Describe the managerial finance function and its relationship to accounting.
3. Understand the legal forms of business organization.
4. Explain why wealth maximization, rather than profit maximization, is the firm’s goal and how the agency issue is related to it.

3. What is Finance? Finance – The art and science of managing money
Finance is the study of money that refers raising fund, managing them and determining their best use.
Major Areas of Finance
The study of finance consists of three areas:
Financial Markets and Institutions
Investments
Managerial Finance : Primary activities of the financial manager
Forecasting and planning
Making investment decisions
Making financing decisions
Coordination and control
Dealing with the financial markets

4. What is Finance? Finance is closely related to Economics Accounting
Based on accounting data
Cash flow emphasis rather than accrual basis
Emphasis on decision making in finance
Three basic factors of difference between finance and accounting: i) Time Value of Money
ii) Profit
iii) Asset

5. Basic Forms of Business Organization

6. Corporate Organization

7. Some Terminologies
Stockholders: The owners of a corporation, whose ownership or equity, is evidences by either common stock or preferred stock.
Stakeholder: Groups such as employees, customers, supplies, creditors, owners, govt. and others who have a direct economic link to the firm.
Dividends: Periodic distributions of earnings to the stockholders of a firm.
Common Stock: The purest and most basic forms of corporate ownership.
Preferred Stock: A special form of ownership having a fixed periodic dividend that must be paid prior to payment of any common stock dividend.
EPS (Earning per Share):The amount earned during the period on behalf of each outstanding share of common stock.
EPS = Total earnings from the common SH / Number of common SH

8. Goal of the Firm
What should be the prime goal of a corporation-----
Profit Maximization??
Stockholders’ wealth Maximization or Stock price Maximization??
Answer: The primary goal of a financial manager should maximize the stockholders wealth by maximizing the price of the firms common stocks. Firms do, of course, have other objectives but stock price maximization is the most important goal for most corporation. Further more, the action that maximize the stock price also increase social welfare. (Page 16 from Brigham’s text)
Goal of the firm can be stated in three ways
Maximize Shareholder Wealth
Maximize the Value of the Firm
Maximize the Share Price

9. Firms’ Stock price determination
Price of a stock depends on the following factors (Page 17 from Brigham’s text):
Projected earning per share
Timing of the earning steam
Riskness of the projected earning
Use of debt
Dividend policy

10. Agency Relationships
Agency Relationships: An agency relationship exist when one or more people (the principals) hire another person (the agent) to perform a service and then delegate decision-making authority to that agent.
Important agency relationships exist between-
Stockholders and managers and
Stockholders and creditors
Agency Problem: A potential conflict of between (1) the principals (outside shareholders) and the agent (manager) or (2) stockholders and creditors.

11. The Agency Issue
In theory, managers would agree with shareholder wealth maximization.
However, managers are also concerned with their personal wealth, job security, and lifestyle.
This would cause managers to act in ways that do not always benefit the firm shareholders

12. Resolving the Agency Issue
If conflict exist several mechanisms are used to motivate manager to act in the
shareholders’ best interests. These includes:
1. The Threat of firing
2. The Threat of takeover: The acquisition of a company over the opposition of its management.Managers may use the following techniques to prevent the hostile takeover---
Poison Pill: an action taken by management to make a firm unattractive to potential buyers and thus to avoid a hostile takeover.(like selling the share at higher price)
Greenmail: A situation in which a firm, trying to avoid a takeover, buys back stock at a price above the existing market price from the person trying to gain control of the firm.
3. Structuring managerial incentives

13. Agency Costs Monitoring expenditures Bonding expenditures
Structuring expenditures
Opportunity costs

14. Assignment
Review Questions (RQ) from the Text (Gitman,chapter-1):
1-1
1-2
1-9
1-10
1-11
1-14
1-15
1-17