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MGMT 640 - Lectures - MGMT 640 WEEKLY LECTURES Week 1...

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MGMT 640 – WEEKLY LECTURES Week 1 Parrino & Kidwell: Chapter 1 The Financial Manager and the Firm Learning Objectives 1. Identify the key financial decisions facing the financial manager of any business firm. 2. Identify the basic forms of business organization used in the United States, and review their respective strengths and weaknesses. 3. Describe the typical organization of the financial function in a large corporation. 4. Explain why maximizing the current value of the firm's stock price is the appropriate goal for management. 5. Discuss how agency conflicts affect the goal of maximizing stockholder wealth. 6. Explain why ethics is an appropriate topic in the study of corporate finance. Chapter Outline 1.1 The Role of the Financial Manager A. It's All about Cash Flows The financial manager is responsible for making decisions that are in the best interest of the firm's owners. A firm generates cash flows by selling the goods and services produced by its productive assets and human capital. After meeting its obligations, the firm can pay the remaining cash, called residual cash flows, to the owners as a cash dividend, or it can keep the money and reinvest the cash in the business. A firm is unprofitable when it fails to generate sufficient cash flows to pay operating expenses, creditors, and taxes. Firms that are unprofitable over time will be forced into bankruptcy by their creditors. In bankruptcy, the company will be reorganized, or the company's assets will be liquidated, whichever is more valuable. If anything is left after all creditor and tax claims have been satisfied, which usually does not happen, the remaining cash, or residual, is distributed to the owners. B. Three Fundamental Decisions in Financial Management The capital budgeting decision: Which productive assets should the firm buy? This the most important decision because they drive the firm's success or failure. The financing decision: How should the firm finance or pay for assets? Working capital management decisions: How should day-to-day financial matters be managed so that the firm can pay its bills, and how should surplus cash be invested? 1.2 Forms of Business Organization 1
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A. A sole proprietorship is a business owned by one person. There is also no legal distinction between personal and business income for a sole proprietor. All business income is taxed as personal income. A sole proprietor is responsible for paying all the firm's bills and has unlimited liability for all business debts and other obligations of the firm. B. A partnership consists of two or more owners joined together legally to manage a business. A general partnership has the same basic advantages and disadvantages as a sole proprietorship.
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