MOS 2310 1
CHAPTER 1 – An Overview of Financial Management and the Financial
• Forms of business organizations:
3. Corporation (conduct more business than other forms)
Sole Proprietorship Partnership Corporation
Who owns the Manager Partners Shareholders
Managers and No No Usually
What is the Unlimited Unlimited Limited
Are the owner and No No Yes
Maximizing stock price maximizing shareholder’s wealth: goal.
FCF: Free cash flow. Many ways to increase these. FCF are cash flows available for
distribution to all investors.
FCF = sales revenues – operating costs – operating taxes – required investments in
WACC: Weighted average cost of capital.
• Transfers of capital between borrowers and savers take place:
o By direct transfers
o By transfers through investment banks
o By transfers though financial intermediaries
• ***Factors that affect the cost of money:
o Production opportunities
o Time preferences for consumption
***See these pages in the textbook! Esp. blue writing. Also pg. 20.
Money markets: The markets for debt securities with maturities of less than 1 year.
Capital markets: Markets for long-term debt and corporate stocks. MOS 2310 2
Primary markets: The markets in which corporations raise new capital.
Secondary markets: Markets in which existing, already outstanding securities are traded
Fixed-income market: Debt securities (ex: bond or any kind of loan).
Over-the-counter exchange: Market has no fixed location, participants are linked
electronically. Ex: currency market.
CLASS NOTES – SEPTEMBER 13 , 2011
ICP 1-1: Advantages and Disadvantages of a Corporation
o Unlimited life
o Easy transfer of ownership
o Limited Liability
o Ease of raising capital
o Double taxation
Corp. taxed on their profit
Investors pay taxes on their dividend income
o Higher setup cost
o Endless report filing
• Role of CFO:
o Treasury function
o Risk management
o Controllership function
What is the meaning of financial management???
It’s about the financing (getting the money) and the investment decision (what particular
assets the company should actually buy). About where the money came from and where it
ICP 1-2: Goals of the Corporation
• Maximize the value of the firm, which will in turn maximize shareholder wealth.
• Profit maximization is not a well-defined objective, because…
1. Maximize which year’s profit? (Increase current profits but damage future
2. Increased future profits by cutting this year’s dividend. MOS 2310 3
3. Calculate profits in different ways.
• To maximize stockholder wealth:
1. Maximize the size of cash inflows
2. Speeding up (delaying) the timing of cash inflows (outflows)
3. Effectively dealing with the risk of cash flows
ICP 1-3: Branch Manager
This will actually hurt the value of the firm in the long term, because the new employees
are not as efficient as the experienced ones.
Agency problems: When personal goals of agents (managers) conflict with corporation
ICP 1-4: How do managers affect shareholder wealth?
• Improve a firm’s ability to generate cash flows now and in the future by focusing on:
o Amount of expected cash flows (bigger is better)
o Timing of the cash flow stream (sooner is better)
o Risk of the cash flow