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Fundamentals of Financial
Management: Concise
Third Edition
Copyright © 2002 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.

Copyright © 2002 by Harcourt, Inc. All rights reserved.

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CHAPTER 1
An Overview of Financial Management

Career opportunities
Issues of the new millennium
Forms of business organization
Goals of the corporation
Agency relationships
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Career Opportunities in Finance

Money and capital markets

Investments
Financial management

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Responsibilities of the Financial Staff

Forecasting and planning

Investment and financing decisions
Coordination and control
Transactions in the financial
markets
Managing risk
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Financial Management
Issues of the New Millennium

Use of computers and electronic

transfers of information
The globalization of business

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Percentage of Revenue and Net

Income from Overseas Operations for
10 Well-Known Corporations, 1999
Percentage of Percentage of
Revenue Originated Net Income
Company Overseas Generated Overseas
Chase Manhattan 23.9 21.9
Coca-Cola 61.2 65.1
Exxon Mobil 71.8 62.7
General Electric 31.7 22.8
General Motors 26.3 55.3
IBM 57.5 49.6
McDonald’s 61.6 60.9
Merck 21.6 43.4
Minn. Mining & Mfg. 52.1 27.2
Walt Disney 15.4 16.6
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Alternative Forms of Business

Organization

Sole proprietorship
Partnership
Corporation

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Sole Proprietorship

Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital
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Partnership

A partnership has roughly the same

advantages and disadvantages as a
sole proprietorship.

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Corporation

Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of set-up and report filing
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Goals of the Corporation

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?
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Agency Relationships

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
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Shareholders versus Managers

Managers are naturally inclined to act

in their own best interests.
But the following factors affect
managerial behavior:
Managerial compensation plans
Direct intervention by shareholders
The threat of firing
The threat of takeover
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Shareholders versus Creditors

Shareholders (through managers)

could take risky actions to
maximize stock price, but are
detrimental to creditors.
In the long run, such actions will
raise the cost of debt and
ultimately lower stock price.

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Does profit maximization equal stock

price maximization?

No, there is generally a high correlation

between EPS, cash flow, and stock
price, but today’s stock price relies not
only on current earnings, but future
earnings and cash flows.
Some actions may increase earnings,
yet cause stock price to decrease (and
vice versa).
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Factors that Affect Stock Price

Projected cash flows to

shareholders
Timing of the cash flow stream
Riskiness of the cash flows

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Factors that Affect the Level and

Riskiness of Cash Flows

Decisions made by financial

managers:
Investment decisions
Financing decisions (the relative
use of debt financing)
Dividend policy decisions
The external environment
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