Chapter 1: The Role of Managerial Finance
Finance the science and art of managing money
Legal forms of business organization: sole proprietorship, partnership and corporation
Sole proprietorships a business owned by one person / raises capital from personal resources or
by borrowing and he/she is responsible for all business decisions / unlimited liability
Partnerships two or more owners doing business together / by written contract (articles of
partnership) / all partners have unlimited liability and each partner is legally liable for all of the debts
Corporation an entity created by law / legal powers of an individual / owners are its stockholders /
limited liability
Goal of the firm:
Shareholders maximize the wealth of the owners for whom it is being operated / maximize
shareholder wealth
Maximize profit? measure profits in terms of earning per share (EPS) (timing, cash flows, risk)
Stakeholders focus groups such as employees, customers, suppliers, creditors, owners
Business ethics standards of conduct or moral judgement
Managerial Finance Function:
size and importance depend on size of the firm; small firms usually have the accounting department
Treasurer manages the firm’s cash, investing surplus funds and securing outside financing
(external)
Controller handles the accounting activities such as corporate/financial/cost accounting, tax
management (internal)
Relationship to economics: financial manager must understand the economic framework / use
theories / marginal cost-benefit analysis
Relationship to accounting: financial manager places primary emphasis on cash flows (cash inflow
and outflow) / financial manager evaluate the accounting statements, develop additional data and
make decisions on the basis of their assessment of the associated returns and risks.
Financial manager’s primary activities making investment (what types of assets the firm holds) and
financing decisions (how the firm raises money to pay for the assets in which it invests)
Governance and Agency:
Corporate Governance rules, processes and laws by which companies are operated, controlled
and regulated / defines the rights and responsibilities of the corporate participants / individual
investors own relatively few shares and have no sufficient influence on firm’s corporate
governance (individuals vote for election of board of directors) / institutional investors they are
,paid to manage and hold large quantities of securities on behalf of individuals, businesses and
governments / often monitor and directly influence a firm’s corporate governance
Managers as the agents of the firm’s shareholders (principal-agent relationship problem with goals
of both parties)
structure management compensation to correspond with firm performance (incentive plans &
performance plans)
, Chapter 3.8: A complete ratio analysis
An overall look at the firm’s financial performance (1) summarizing all ratios or (2) the DuPont
system of analysis
(1) Liquidity, activity, debt, profitability and market to view all aspects of the firm’s financial
activities to isolate key areas of responsibility
(2) Measure profitability, return on total assets (ROA), return on common equity (ROE) Used
to dissect the firm’s financial statements and to assess its financial condition
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