<p> An Overview of Managerial Finance</p><p>After reading this chapter, students should be able to:  Explain the career opportunities available within the three interrelated areas of finance.  Identify some of the forces that will affect financial management in the new millennium.  Briefly explain the responsibilities of the financial staff within an organization.  Describe the advantages and disadvantages of alternative forms of business organization.  State the primary goal in a publicly traded firm, and explain how social responsibility and business ethics fit in.  Define an agency relationship, give some examples of potential agency problems, and identify possible solutions.  Identify major factors that determine the price of a company’s stock, including those that managers have control over and those that they do not.  Discuss whether financial managers should concentrate strictly on cash flow and ignore the impact of their decisions on EPS.</p><p>Major Areas in Finance</p><p> Financial Markets and Institutions</p><p>Financial Institution: An enterprise such as a bank whose primary business and function is to collect money from the public and invest it in financial assets such as stocks and bonds. Institutions that provide the market function of matching borrowers and lenders or traders.</p><p>Financial Market: An organized institutional structure or mechanism for creating and exchanging financial assets.</p><p> Investments</p><p>As a discipline, the study of financial securities, such as stocks and bonds, from the investor's viewpoint. The process of managing money. Also called portfolio management and money management. Investment decisions at the corporate level deal with the asset side of a firm's balance sheet, such as the decision to offer a new product.</p><p>1  Managerial Finance</p><p>It deals with the operation of the firm (both the investment decision and the financing decision) from the firm's point of view. The application of financial principles within a corporation to create and maintain value through decision-making and proper resource management.</p><p>Important Trends</p><p> Globalization of Business: Tendency toward a worldwide investment environment, and the integration of national capital markets.</p><p> Information Technology</p><p> Government Regulatory Attitude</p><p>Deregulation: The reduction of government's role in controlling markets, which lead to freer markets, and presumably a more efficient marketplace.</p><p>The Financial Manager's Responsibilities</p><p> Forecasting and planning: Strategic planning, pro-forma financial statements, cash budgeting.</p><p> Major investment and financing decisions: Capital budgeting, capital structure and cost of capital decisions.</p><p> Coordination and control</p><p> Dealing with financial markets: Raising funds in the money and capital markets.</p><p>Types of Business Organization</p><p> Proprietorship: An unincorporated business that is owned and operated by only one person, who has complete liability for all assets, and complete rights to all profits.</p><p> Partnership: Shared ownership among two or more individuals, some of whom may, but do not necessarily, have limited liability.</p><p>2  Corporation: A legal entity that is separate and distinct from its owners. A corporation is allowed to own assets, incur liabilities, and sell securities, among other things.</p><p>Financial Positions in the Organizational Structure</p><p> Treasurer: The corporate officer responsible for designing and implementing many of the firm's financing and investing activities, including credit and inventory management, cash management, capital budgeting and capital structure decisions.</p><p> Controller: The corporate manager responsible for the firm's accounting activities, including cost (managerial) accounting, financial accounting and tax management and reporting.</p><p>Goals of the Corporation</p><p> Stockholder Wealth Maximization: Maximize the value of the firm as measured by the price of the firm's common stock.</p><p>1. Projected earnings per share (vs. total corporate profits). 2. Timing of the earnings stream (wealth measured by the stock price - PV). 3. Riskiness of the projected earnings. 4. Use of debt (financial leverage). 5. Dividend policy (cash dividends vs. retention of earnings).</p><p>Agency Relationships</p><p>Agency theory: The analysis of principal-agent relationships, in which one person, an agent, acts on behalf of another person, a principal.</p><p>Agent: The decision-maker in a principal-agent relationship.</p><p>Agency problem : Conflicts of interest among stockholders, bondholders, and managers. </p><p> Stockholders versus Managers: The owner's of the firm (common stockholders), are not involved in the day to day decision-making process. Through their voting rights, stockholders elect the Board of Directors who act as their agents.</p><p>3 1. The threat of firing.</p><p>2. The threat of takeover.</p><p>- Hostile takeover: A takeover of a company against the wishes of the current management and the board of directors by an acquiring company or raider.</p><p>- Poison pill: Anti-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the firm or shares of anyone who acquires the firm at a deep discount to their fair market value.</p><p>- Greenmail: The holding of a large block of stock of a target company by an unfriendly company, with the object of forcing the target company to repurchase the stock at a substantial premium to prevent a takeover.</p><p>3. Managerial incentives</p><p>- Executive stock options: An incentive plan that allows managers to purchase stock at some future time at a given price. </p><p>- Performance shares: Shares of stock given to managers on the basis of performance as measured by earnings per share and similar criteria. A control device used by companies to tie management to self-interest of shareholders.</p><p> Stockholders versus Creditors: Actions that benefit common stockholders may do harm to the firm's creditors. The bondholder's returns are for the most part fixed; therefore, if the risk of the firm is increased, creditors will suffer.</p><p>Business Ethics</p><p>1. Avoid fines and legal expenses. 2. Build public trust. 3. Attract business from customers who support the firm's policies. 4. Attract and retain employees of the highest caliber. 5. Support the economic viability of the surrounding community.</p><p>4</p>