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Instructor Manual For Foundations of Financial Management 17th Edition by Stanley Block, Geoffrey Hirt, Bartley Danielsen Chapter 1-21

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Instructor Manual For
Foundations of Financial Management 17thEdition by Stanley Block,
Geoffrey Hirt, Bartley Danielsen
Chapter 1-21

Chapter 1
The Goals and Activities of
Financial Management

Author’s Overview

The major thrust of this chapter is toestablish theobjectives of financial management and
theimportance of thefinancial manager totheorganization. theintroduction focuses on thefinancial
decisions that a company like 3M makes and allows theinstructor tobring thereal world into
theclassroom immediately. Although thefinancial crisis might not be at theforefront of
thestudent’s mind, it provides a good example of therisk that management and investors face.
theDodd-Frank Act can be used todiscuss legislative reaction tothebehavior of financial 1
institutions and totalk about theunintended consequences that often come out of such regulations.
thevarious forms of organizations should be developed, and theFinance in Action Box ―The
Endangered Public Company‖ points out theproblems of public companies and discusses state
owned enterprises (SOEs) found in many foreign countries. This provides a good place tostart
thediscussion of thevarious forms of organization. theinstructor should highlight theimportance
of owner wealth maximization as a goal and briefly relate it tovaluation concepts associated with
risk and return. In addition, therole and functions of thefinancial markets in allocating capital
should be emphasized as well as thepressures of institutional investors on financial managers.
thestudent should also be directed totheshortfalls of profit maximization as theultimate goal of
thefirm. A short discussion of social responsibility and its relationship tothefinancial objectives
of thefirm can engage students in a discussion of how wealth maximization and social
responsibility can co-exist. theFinance in Action box on the3M Company is a good example of
this co-existence. We end thechapter with a short discussion of theimpact of internationalization
and information technology on financial markets.

Chapter Concepts

LO1. The field of finance integrates concepts from economics, accounting, and a number of
other areas.

LO2. A firm can have many different forms of organization.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without theprior written consent of McGraw-
Hill Education.

7-1

,LO3. The relationship of risk toreturn is a central focus of finance.

LO4. The primary goal of financial managers is tomaximize thewealth of theshareholders.

LO5. Financial managers attempt toachieve wealth maximization through daily activities
such as credit and inventory management and through longer-term decisions related
toraising funds.

LO6. The financial turmoil that roiled themarkets between 2001 and 2012 resulted in more
regulatory oversight of thefinancial markets.

Annotated Outline and Strategy

I. The Field of Finance

A. Finance is a link between accounting, economics, and other related fields of
study. A financial manager must understand theFederal Reserve System,
thecommercial banking system, and theinterrelationships between various sectors
of theeconomy.

B The financial manager must know how tointerpret and use financial statements
in assessing thefirm’s performance and allocating thefirm’s financial resources
togenerate thebest return possible in thelong run.

C. The demand for financial management skills exists in many sectors of our society
including corporate management, financial institutions, consulting, and even non-
profit organizations.

II. Evolution of theField of Finance

A. The field of finance is closely tied toeconomics and accounting but achieved
recognition as a separate field of study in response tothemergers, acquisitions,
and growth of corporations in theearly 1900s.

B. As a result of theGreat Depression, emphasis shifted from raising capital,
tocapital preservation, maintenance of liquidity, and increased government
intervention in thefinancial aspects of businesses.

C. By themid-1950s thefield of finance had become more decision oriented with an
emphasis on theanalysis of resource utilization within thefirm. This decision-
making focus was manifested in theincreased study of:

1. Fixed asset management: capital budgeting.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without theprior written consent of McGraw-
Hill Education.

7-2

, 2. Efficient utilization of current assets.
3. Capital structure composition.

Perspective 1-1: Mention finance professors who have won Nobel prizes for their work on
risk and return, portfolio management, and CAPM theory. Also mention theprizes for what we
now call behavioral finance.

4. Dividend policy.

D. For thepast 30 years, emphasis has been placed on therisk-return relationship.
thestudy of finance has received increased recognition including Nobel Prize
awards.

E. In the21st century, finance has become more mathematical and analytical; it has
also become more focused on behavioral finance, or thepsychology of financial
decision-making. Behavioral finance helps us understand how financial managers
make risk-return trade-off. There also has been an increased emphasis on risk
minimization and governmental regulation.

III. Risk Management and a Review of theFinancial Crises

A. Risk management will assume an even greater role as theeconomy recovers
from thehousing mortgage crisis that began in theearly part of thenew
millennium. Poor risk management practices, bad credit approval guidelines,
and inaccurate investment rating practices lead toseveral bank failures and
economic chaos.

B. The Dodd-Frank Act, officially known as theWall Street Reform and
Consumer Protection Act of 2010, is thefirst major financial regulatory change
in theUnited States since theGreat Depression. It is a complex law with many
provisions for oversight of financial institutions and their investing and
lending activities as well as setting up theBureau of Consumer Financial
Protection.

C. Impact of Information Technology: thequestion for the21st century is how
technology will impact financial decision making. theInternet has changed
theway businesses interact with consumers (B2C) and with other businesses
(B2B) and will have a major impact on financial management.

IV. Activities of Financial Management. A financial manager is responsible for
theproper allocation of funds between current and fixed assets, for achieving thebest mix of
financing alternatives, and for developing an appropriate dividend policy within thecontext of
thefirm’s objectives.

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without theprior written consent of McGraw-
Hill Education.

7-3

, A. Daily financial management activities

1. Credit management
2. Inventory control
3. Receipt and disbursement of funds

B. Less routine or occasional activities

1. Sale of stocks and bonds
2. Capital budgeting

PPT Functions of theFinancial Manager (Figure 1-1)

3. Dividend decisions

C. Forms of organization: thefinance function may be carried out within a number of
different forms of organizations.

1. Impact of 2017 Tax Cuts and Job Act on Organizations

a. Corporate tax rate goes from 35 percent to21 percent
b. U.S. companies on competitive footing with other countries.
c. Sole proprietorships, partnerships, and limited liability partnerships are
pass through organizations.
d. 20 percent deductions of qualified business income from pass through
businesses
e. 20 percent deduction reduces taxable income

Finance in Action: theEndangered Public Company
This box highlights some of theproblems of being a public company and also theuse of state-
owned enterprises by many foreign governments.

2. Sole proprietorship

a. Single ownership
b. Simplicity of decision making
c. Low organizational and operating costs
d. Unlimited liability
e. Earnings are taxed as personal earnings of theindividual owner

3. Partnership

Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without theprior written consent of McGraw-
Hill Education.

7-4

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