FIN 315 CHAPTER NOTES.docx - Chapter 1 Introduction to...

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Chapter 1: Introduction to Managerial Finance 1. What is Finance? Finance can be defined as the science and art of managing money. Managerial Finance is concerned with the duties of the financial manager working in a business, such as: how to raise money from investors, how to invest money to earn a profit, and how to distribute profits back to investors or reinvest profits in the business. 2. Legal Forms of Business Organization A sole proprietorship is a business owned by one person and operated for his or her own profit. A partnership is a business owned by two or more people and operated for a profit. A corporation is an entity created by law. Corporations have the legal powers of an individual in that it can sue and be sued, make and be party to contracts, and acquire property in its own name. The advantages of corporation: limited liability, transferable ownership, better access to finance, larger size via sale of ownership, etc. The disadvantages of corporation: higher tax (both corporate income and dividends paid to owners are taxed), more expensive to operate, greater government regulation, etc. 3. Goal of the Firm: Maximize Shareholder Wealth The goal of the firm is maximize its value, and therefore the wealth of its shareholders. Maximizing the value of the firm means running the business in the interest of those who own it—the shareholders. Decision rule for managers: only take actions that are expected to increase the share price. 4. Governance and Agency: The Agency Issue: The separation of owners and managers is a classic principle-agent relationship , where the shareholders are the principles and managers are the agents. Agency problems arise when managers place personal goals ahead of the goals of shareholders. A firm’s corporate governance structure is intended to help ensure that managers act in the best interests of the firm’s shareholders. 5. Governance and Agency: Corporate Governance Corporate governance refers to the rules, processes, and laws by which companies are operated, controlled, and regulated. It defines the rights and responsibilities of the corporate participants such as the shareholders, board of directors, officers and managers, and other stakeholders, as well as the rules and procedures for making corporate decisions.
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It is influenced by bother internal and external factors. 6. Governance and agency: Individual versus Institutional Investors Individual investors are the investors who own relatively small quantities of shares to meet personal investment goals. Institutional investors are investment professionals, such as banks, insurance companies, mutual funds, and pension funds, that are paid to manage and hold large quantities of securities on behalf of others.
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