ch01 - Chapter 1 The Financial Manager and the Firm...

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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 in the United States and 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 is the appropriate goal for management. 5. Discuss how agency conflicts affect the goal of maximizing shareholder value. 6. Explain why ethics is an appropriate topic in the study of corporate finance. I. Chapter Outline 1.1 The Role of the Financial Manager A. Stakeholders B. 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 1
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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. C. Three Fundamental Decisions in Financial Management The capital budgeting decision: Which productive assets should the firm buy? This is the most important decision because they drive the firm’s success or failure. The financing decision: How should the firm finance its 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 A. A sole proprietorship is a business owned by one person. Sole proprietors keep all the profits from the business and do not have to share decision making authority. All business income is taxed as personal income. The simplest and least regulated type of business to start. 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. 2
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A general partnership has the same basic advantages and disadvantages as a sole proprietorship. The problem of unlimited liability can be avoided in a limited partnership where there must still be a general partner with unlimited liability. C. Corporations are legal entities authorized under a state charter. In a legal sense, it is a “person” distinct from its owners. The owners of a corporation are its stockholders. A major advantage of the corporate form of business is that stockholders have limited liability for debts and other obligations of the corporation. A major disadvantage of the corporate form of organization is taxes.
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This note was uploaded on 04/01/2012 for the course BUSINESS 100 taught by Professor Bens during the Spring '12 term at FIU.

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ch01 - Chapter 1 The Financial Manager and the Firm...

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