The Financial Manager Chapter 1 The stockholders owners are not directly involved in making business decisions o Hire managers to represent their interests and to make decision on their behalf o Financial manager is usually associated with the CFO o Controller s handle financial accounting tax payments and MIS o Treasurer s managing the firms cash and credit financial planning and capital expenditures Financial Management Decisions Capital Budgeting the process of planning and managing a firm s long term investments o Identify opportunities that profit cost o Important to configure How much When do they get it How likely are they to receive it Capital Structure the mixture of debt and equity maintained by a firm o What percentage goes to the shareholders o What percentage goes to creditors o There is flexibility here Working Capital Management Working capital a firm s short term assets and liabilities o As mentioned before capital budgeting capital structure and working capital The three areas management Forms of Business Organizations Sole Proprietorship a business owned by a single individual o Advantages Simplest Least regulated Keeps all profits Single taxation No agency problems o Disadvantages Unlimited Liability All income is considered personal income Can go after personal assets Hard to raise capital o Business can t grow if the funds aren t available Harder to liquidate o Lives as long as the owner lives or can be sold Partnerships two or more individuals or entities have similar characteristics as sole proprietorships a business formed by o General partnership all have equal gains and loses o Limited partnership not actively participating in business operations a business created as a distinct legal entity composed of one or more Corporations individuals or entities o Most important o Considered a person has rights duties and privileges o Most complicated to start Often is made from a sole proprietorship Has a set of bylaws that need to be abided Articles of incorporation Charter o Advantages Limited liability Easier to raise capital Easier to transfer ownership Unlimited life o Disadvantages Double taxation doesn t apply if they don t pay dividends Agency problem comes later in notes The Goal of Financial Management Increase and maximize market value Financial manager in a corporation makes decisions for the stockholders Agency Problem and Control of the Corporation Stockholders and management EQUALS agency relationship Agency problem management of a firm the possibility of conflict of interest between the stockholders and o Economic incentive Reasons for the manager not to mess up Managerial compensation Job prospects Promotion Stakeholders on the cash flow of the firm Financial Markets and the Corporation Primary versus Secondary Markets someone other than a stockholder or creditor who potentially has a claim o Primary markets original sale of securities by governments and corporations o Secondary Markets securities are bought and sold after the original sale Primary Markets o Corporation is the seller o Transaction raises money for the corporation Two types of transactions Public offering Selling securities to the general public o Must be registered with SEC securities and exchange commission o Great deal of information must be disclosed before sale Initial Public Offering IPO Private placements involves a specific buyer o Doesn t require what public offerings do Secondary Markets o Involves the owner or creditor selling to another Securities can be later resold if desired o Dealer versus Auction Markets Auction Markets Differ from dealer markets in two ways o Has a physical location o Match those who wish to sell with those who wish to buy Dealers play a limited role Dealer Markets buy and sell at their own risk Over the Counter Dealer markets in long term debt Trading in Corporate Securities o NYSE 85 of all the shares traded in auction markets Is the largest too o NASDAQ two times as many companies here than in the NYSE Tend to be smaller Trade less actively Listing o Stocks that trade on an organized exchange Chapter 2 Balance Sheet financial statement showing a firm s accounting value on a particular The Balance Sheet date o Assets Are listed in the order of the time it takes to be converted to cash Current Has a life of under a year o Inventory o Accounts fixed Has a relatively long life Tangible Intangible o Computer or truck o Patents or trademarks o Liabilities Are listed on the right side of the balance sheet Order from which they would normally be paid Current Life less than one year Listed before long term liabilities Long term Ex Loan Includes bonds and bondholders Shareholder s equity current assets current liabilities Assets liabilities shareholders equity Also called the balance sheet identity o Net Working Capital Current assets less current liabilities Positive when current assets surpass current liabilities o Three things to keep in mind Liquidity the speed and ease in which an asset can be turned into cash Is valuable Two dimensions o Ease of conversion o Loss of value The more liquid a business is the less likely they are to have financial stress o Financial leverage the use of debt in a firm s capital structure Market Value Versus Book Value o Generally accepted accounting principles GAAP and procedure by which audited financial statements are prepared the common set of standards o Assets are book value Historical Cost carried in the books meaning they are put in the books at their original cost not what they are worth now or how long ago they were purchased o Understanding the difference between book value and market value helps understand the impact of reported gains or loses Market value what the firm is worth today The Income Statement Income statement financial statement summarizing a firm s performance over a period of time o Revenues expenses income o Usually quarterly or annually o First thing recorded is revenue and expenses o Last is net income Sometimes called EPS or earnings per share Revenue is recognized at the time of sale None Cash Items cash flow such as depreciation expenses charged against revenues that do not directly affect o Depreciation is the most important Isn t cash but an accounting number o Product costs overhead raw materials direct labor expense and manufacturing o Period costs administrative expenses reported in a particular time period as selling or Average tax rate total taxes paid divided by total taxable
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