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Ch. 1 - An Introduction to

Financial Management

2002, Prentice Hall, Inc.

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Goal of the F irm

1) Profit Maximization?

this goal ignores:

a) TIMING of Returns

(Time Value of Money - Ch. 5)

b) UNCERTAINTY of Returns

(Risk - Ch. 6)

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Goal of the F irm

2) Shareholder Wealth

Maximization?

this is the same as:

a) Maximizing Firm Value

b) Maximizing Stock Price

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Legal Forms of Business

1) Sole Proprietorship

A business owned by a single individual.

Owner maintains title to the firms assets.

Owner has unlimited liability.

2) Partnership

Similar to a sole proprietorship, except

that there are two or more owners.

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2a) General Partnership

All partners have unlimited liability.

2b) Limited Partnership

Consists of one or more general partners,

who have unlimited liability, and

One or more limited partners (investors)

whose liability is limited to the amount of

their investment in the business.


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3) Corporation

A business entity that legally functions

separate and apart from its owners.

Owners liability is limited to the amount

of their investment in the firm.

Owners hold common stock certificates,and ownership can be transferred by

selling the certificates.


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The Corporation and F inancial

Markets

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Markets

Corporation

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Markets

Corporation Investors

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Markets

Government


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Markets

cash

Government


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Markets

cash

Government

securities


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Markets

Government

cash

securities


Secondary

markets

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Markets

Government

cash

securities


Secondary

markets

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Markets

Government

cash

securities


Secondary

markets

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Markets

cashInvestors

Secondary

markets

Government

securities

Cash flow

Corporation

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Markets

cashInvestors

Secondary

markets

Government

securities

Cash flow

reinvest

tax

Corporation

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Markets

cashInvestors

Secondary

markets

Government

securities

Cash flow

reinvest

tax

Corporation

dividends,

etc.

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Markets

Primary Market

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Primary Market

Market in which new issues of a

security are sold to initial buyers.


Markets

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Primary Market


security are sold to initial buyers. Secondary Market


Markets

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Primary Market


security are sold to initial buyers. Secondary Market

Market in which previously issued

securities are traded.


Markets

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Initial Public Offering (IPO)


Markets

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The first time the firms stock is

sold to the general public.


Markets

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sold to the general public. Seasoned New Issue


Markets

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sold to the general public. Seasoned New Issue

A new stock offering by a firm that

already has stock that is traded inthe secondary market.


Markets

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F inancial Management Axioms

1) Risk - return trade-off

2) Time value of money

3) Cash - not profits - is king

4) Incremental cash flows count

5) The curse of competitive markets

6) Efficient capital markets

7) The agency problem 8) Taxes bias business decisions

9) All risk is not equal

10) Ethical dilemmas are everywhere in finance

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fmch01.ppt