Chapter 1The Financial Manager• The stockholders(owners)- are not directly involved in making business decisionso Hire managers to represent their interests and to make decision on their behalfo Financial manager is usually associated with the CFOo Controller’s handle financial accounting tax payments and MISo Treasurer’s managing the firms cash and credit, financial planning, and capital expendituresFinancial Management Decisions• Capital Budgeting - the process of planning and managing a firm’s long term investmentso Identify opportunities that profit >costo 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 firmo What percentage goes to the shareholders?o What percentage goes to creditors?o There is flexibility hereWorking Capital Management• Working capital - a firm’s short term assets and liabilities• The three areas: o As mentioned before: capital budgeting, capital structure, and working capital managementForms of Business Organizations• Sole Proprietorship - a business owned by a single individualo Advantages- Simplest Least regulated Keeps all profits Single taxation No agency problems All income is considered personal incomeo Disadvantages- Unlimited Liability• Can go after personal assets• Hard to raise capitalo Business can’t grow if the funds aren’t available• Harder to liquidateo Lives as long as the owner lives… or can be sold• Partnerships -have similar characteristics as sole proprietorships- a business formed by two or more individuals or entitieso General partnership- all have equal gains and loseso Limited partnership- not actively participating in business operations • Corporations : a business created as a distinct legal entity composed of one or more individuals or entitieso Most importanto 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 lifeo 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 stockholdersAgency Problem and Control of the Corporation• Stockholders and management EQUALS agency relationship• Agency problem - the possibility of conflict of interest between the stockholders and management of a firmo Economic incentive- Reasons for the manager not to mess up! Managerial compensation Job prospects• Promotion• Stakeholders - someone other than a stockholder or creditor who potentially has a claim on the cash flow of the firmFinancial Markets and the Corporation• Primary versus Secondary Marketso Primary markets - original sale of securities by governments and corporationso Secondary Markets - securities are bought and sold after the original sale• Primary Marketso Corporation is the sellero Transaction raises money for the corporation Two types of transactions-• Public offering- Selling securities to the general publico 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 buyero Doesn’t require what public offerings do• Secondary Marketso Involves the owner or creditor selling to another Securities can be later resold if desiredo Dealer versus Auction Markets Auction Markets • Differ from dealer markets in two ways:o Has a physical locationo 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 tooo NASDAQ-two times as many companies here than in the NYSE Tend to be smaller Trade less actively• Listingo Stocks that trade on an organized exchange Chapter 2The Balance Sheet• Balance Sheet - financial statement showing a firm’s accounting value on a particular dateo Assets Are listed in the order of the time it takes to be converted to cash Current• Has a life of under a yearo Inventoryo Accounts fixed• Has a relatively long life• Tangibleo Computer or truck• Intangibleo Patents or trademarkso 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 identityo Net Working Capital Current assets less current liabilities• Positive when current assets surpass current liabilitieso 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 conversiono Loss of value• The more liquid a business is, the less likely they are to have financial stresso Financial leverage - the use of debt in a firm’s capital structure• Market Value Versus Book Valueo Generally accepted accounting principles (GAAP) - the common set of standards and procedure by which audited financial statements are preparedo 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 purchasedo 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 todayThe Income Statement• Income statement- financial statement summarizing a firm’s performance over a period of timeo Revenues—expenses=incomeo Usually quarterly or annuallyo First thing recorded is revenue and expenseso Last is net income Sometimes called EPS or earnings per share Revenue is recognized at the time of sale• None Cash Items
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