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Fundamentals of Financial ManagementNinth Edition

Copyright © 2001 by Harcourt, Inc.

All rights reserved.

Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

ISBN 0-03-031478-X

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Career opportunities

Issues of the new millennium

Forms of business organization

Goals of the corporation

Agency relationships

CHAPTER 1An Overview of Financial Management

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Money and capital markets

Investments

Financial management

Career Opportunities in Finance

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Use of computers and electronic transfers of information

The globalization of business

Financial ManagementIssues of the new millennium

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3M 51.7 26.9Chase Manhattan 27.8 26.6Coca-Cola 62.3 64.6Exxon 80.1 65.1General Electric 23.9 31.1General Motors 30.8 68.0IBM 56.8 68.9McDonald’s 60.8 71.7Merck 24.9 27.4Walt Disney 16.7 18.9

Percentage of Revenue and Net Income from Overseas Operations for

10 Well-Known Corporations, 1998Percentage of Percentage of

Revenue Originated Net IncomeCompany Overseas Generated Overseas

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Forecasting and planning

Investment and financing decisions

Coordination and control

Transactions in the financial markets

Managing risk

Responsibilities of the Financial Staff

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Sole proprietorship

Partnership

Corporation

Alternative Forms of Business Organization

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Advantages:Ease of formationSubject to few regulationsNo corporate income taxes

Disadvantages:Limited lifeUnlimited liabilityDifficult to raise capital

Sole Proprietorship

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A partnership has roughly the same advantages and disadvantages as a sole proprietorship.

Partnership

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Advantages:Unlimited lifeEasy transfer of ownershipLimited liabilityEase of raising capital

Disadvantages:Double taxationCost of set-up and report filing

Corporation

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The primary goal is shareholder wealth maximization, which translates to maximizing stock price.Do firms have any responsibilities

to society at large?Is stock price maximization good or

bad for society?Should firms behave ethically?

Goals of the Corporation

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An agency relationship exists whenever a principal hires an agent to act on their behalf.

Within a corporation, agency relationships exist between:

Shareholders and managers

Shareholders and creditors

Agency Relationships

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Managers are naturally inclined to act in their own best interests.

But the following factors affect managerial behavior:Managerial compensation plansDirect intervention by shareholdersThe threat of firingThe threat of takeover

Shareholders versus Managers

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Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors.

In the long run, such actions will raise the cost of debt and ultimately lower stock price.

Shareholders versus Creditors

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Projected cash flows to shareholders

Timing of the cash flow stream

Riskiness of the cash flows

Factors that Affect Stock Price

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Factors that Affect the Level and Riskiness of Cash Flows

Decisions made by financial managers:Investment decisionsFinancing decisions (the relative

use of debt financing)Dividend policy decisions

The external environment