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    KMPS CH 01

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    Ismail Hossain
    This chapter introduces key concepts in financial management. It discusses the perspectives of finance in the past, present, and future. It also outlines the goals of a firm and ten basic principles of finance. Some of the main goals of a corporation include maximizing shareholder wealth and cash flow management. The chapter also describes different legal forms of business like sole proprietorships, partnerships, and corporations. It provides an overview of how corporations interact with financial markets and investors.

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    KMPS CH 01

    Uploaded by

    Ismail Hossain
    35 views34 pages
    This chapter introduces key concepts in financial management. It discusses the perspectives of finance in the past, present, and future. It also outlines the goals of a firm and ten basic principles of finance. Some of the main goals of a corporation include maximizing shareholder wealth and cash flow management. The chapter also describes different legal forms of business like sole proprietorships, partnerships, and corporations. It provides an overview of how corporations interact with financial markets and investors.

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    This chapter introduces key concepts in financial management. It discusses the perspectives of finance in the past, present, and future. It also outlines the goals of a firm and ten basic principles of finance. Some of the main goals of a corporation include maximizing shareholder wealth and cash flow management. The chapter also describes different legal forms of business like sole proprietorships, partnerships, and corporations. It provides an overview of how corporations interact with financial markets and investors.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    35 views34 pages

    KMPS CH 01

    Uploaded by

    Ismail Hossain
    This chapter introduces key concepts in financial management. It discusses the perspectives of finance in the past, present, and future. It also outlines the goals of a firm and ten basic principles of finance. Some of the main goals of a corporation include maximizing shareholder wealth and cash flow management. The chapter also describes different legal forms of business like sole proprietorships, partnerships, and corporations. It provides an overview of how corporations interact with financial markets and investors.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 34

    Ch.

    1 - An Introduction to
    Financial Management

     2002, Prentice Hall, Inc.


    • What is Finance?
    • Perspective of Finance
    – Past – Financial Statement Analyses
    – Present – Short-Term Financial Management
    – Future – Capital Budgeting
    • Goals of the Firm
    • Ten Basic Principles of Finance
    Goal of the Firm

    1) Profit Maximization?
    this goal ignores:
    a) TIMING of Returns
    (Time Value of Money - Ch. 5)
    b) UNCERTAINTY of Returns
    (Risk - Ch. 6)
    Goal of the Firm

    2) Shareholder Wealth
    Maximization?
    this is the same as:
    a) Maximizing Firm Value
    b) Maximizing Stock Price
    GOALS OF THE CORPORATION
    1. Maximize Shareholder’s Wealth
    2. Optimum Cash Flow Management
    3. Optimum Investment Management
    4. Optimum Inventory Level Management
    5. Optimum Debt-Equity Ratio
    6. Optimum Risk-Return Trade-Off
    7. Optimum Dividend Payout Ratio
    8. Minimize Interest & Capital Cost
    9. Minimize Tax Burden
    10. Effective & Efficient Financial Control
    11. Effective & Efficient Financing of Growth
    12. Optimize Social & Societal Welfare
    13. Avoiding Bankruptcy
    14. Maximize Distribution of Wealth
    15. Maximize Distribution of Ownership
    Legal Forms of Business
    1) Sole Proprietorship
    • A business owned by a single individual.
    • Owner maintains title to the firm’s assets.
    • Owner has unlimited liability.

    2) Partnership
    • Similar to a sole proprietorship, except
    that there are two or more owners.
    Legal Forms of Business
    2a) General Partnership
    • All partners have unlimited liability.

    2b) Limited Partnership


    • Consists of one or more general partners,
    who have unlimited liability, and
    • One or more limited partners (investors)
    whose liability is limited to the amount of
    their investment in the business.
    Legal Forms of Business
    3) Corporation
    • A business entity that legally functions
    separate and apart from its owners.
    • Owners’ liability is limited to the amount
    of their investment in the firm.
    • Owners hold common stock certificates,
    and ownership can be transferred by
    selling the certificates.
    The Corporation and Financial
    Markets
    The Corporation and Financial
    Markets

    Corporation
    The Corporation and Financial
    Markets

    Corporation Investors
    The Corporation and Financial
    Markets

    Corporation Investors

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors


    securities

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors


    securities

    Secondary
    markets

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors


    securities

    Secondary
    markets

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors


    securities

    Secondary
    markets

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors


    securities

    Secondary
    markets
    Cash flow

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors


    securities

    Secondary
    markets
    Cash flow

    tax

    Government
    The Corporation and Financial
    Markets

    Corporation cash Investors


    securities
    reinvest
    Secondary
    markets
    Cash flow

    tax

    Government
    The Corporation and Financial
    Markets
    Corporation cash Investors
    Debt & equity
    securities
    reinvest
    Secondary
    markets
    Interest,
    Cash flow dividends,
    etc.
    tax

    Government
    BUSINESS

    INVESTMENT
    The Corporation and Financial
    Markets
    • Primary Market
    The Corporation and Financial
    Markets
    • Primary Market
    – Market in which new issues of a
    security are sold to initial buyers.
    The Corporation and Financial
    Markets
    • Primary Market
    – Market in which new issues of a
    security are sold to initial buyers.
    • Secondary Market
    The Corporation and Financial
    Markets
    • Primary Market
    – Market in which new issues of a
    security are sold to initial buyers.
    • Secondary Market
    – Market in which previously issued
    securities are traded.
    The Corporation and Financial
    Markets
    • Initial Public Offering (IPO)
    The Corporation and Financial
    Markets
    • Initial Public Offering (IPO)
    – The first time the firm’s stock is
    sold to the general public.
    The Corporation and Financial
    Markets
    • Initial Public Offering (IPO)
    – The first time the firm’s stock is
    sold to the general public.
    • Seasoned New Issue
    The Corporation and Financial
    Markets
    • Initial Public Offering (IPO)
    – The first time the firm’s stock is
    sold to the general public.
    • Seasoned New Issue
    – A new stock offering by a firm that
    already has stock that is traded in
    the secondary market.
    FINANCIAL MARKETS, INSTITUITION & INSTRUMENTS

     Primary Markets

     Secondary Markets

     Money Markets
    o T-Bills
    o Federal Agency Discount Notes
    o Short Term Munis
    o Federal Funds
    o Negotiable Certificate of Deposits
    o Commercial Paper
    o Bankers Acceptance
    o Repos

     Mortgage Markets
    FINANCIAL MARKETS, INSTITUITION & INSTRUMENTS

     Capital Markets
    o Debt
    o Equity
    o Common Shares
    o Preferred Shares
     Bond Markets
    o T-Bonds
    o Agency Debt
    o Munis Bonds
    o Corporate Bonds
     Futures Market, i.e., real or financial assets
    o Options
    o Forwards
    o Derivatives
    Financial Management Axioms
    • 1) Risk - return trade-off
    • 2) Time value of money
    • 3) Cash - not profits - is king
    • 4) Incremental cash flows count
    • 5) The curse of competitive markets
    • 6) Efficient capital markets
    • 7) The agency problem
    • 8) Taxes bias business decisions
    • 9) All risk is not equal
    • 10) Ethical dilemmas are everywhere in finance
    BUSINESS
    INVESTMENT
    ASSETS Ξ FINANCE
    S/T INV + L/T INV Ξ S/T FINANCE + L/T FINANCE

    C A + F A = C L + LTD + EQUITY

    Cash Plant & Equipment Short Term Loan Long Term Preferred
    Marketable Securities Current Maturities Debt Share
    Machinery Accounts Payable Bank Loans Ordinary Share
    Accounts Receivables Capital WIP Notes Share Premium Notes Treasury Stock
    Inventory Land Accrued Expenses Bonds Retained Earnings
    Others Investments (Land) Proposed Dividend Reserves

    • S/T= SHORT TERM, L/T=LONG TERM, INV= INVESTMENT


    • CA= CURRENT ASSETS, FA= FIXED ASSETS, CL= CURRENT LIABILITY
    • CM= CURRENT MATURITY, WIP= WORK IN PROGRESS

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