Principles of Managerial Finance

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PART 1 Introduction to Managerial Finance CHAPTERS IN THIS PART 1 2 3 The Role and Environment of Managerial Finance Financial Statements and Analysis Cash Flow and Financial Planning INTEGRATIVE CASE 1: TRACK SOFTWARE, INC. CHAPTER 1 The Role and Environment of Managerial Finance INSTRUCTOR’S RESOURCES Overview This chapter introduces the student to the field of finance and explores career opportunities in both financial services and managerial finance. The three basic legal forms of business organization (sole proprietorship, partnership, and corporation) and their strengths and weaknesses are described, as well as the relationship between major parties in a corporation. The managerial finance function is defined and differentiated from economics and accounting. The chapter then summarizes the three key activities of the financial manager: financial analysis and planning, investment decisions, and financing decisions. A discussion of the financial manager’s goals – maximizing shareholder wealth and preserving stakeholder wealth – and the role of ethics in meeting these goals is presented. The chapter includes discussion of the agency problem – the conflict that exists between managers and owners in a large corporation. Money and capital markets and their major components are introduced in this chapter. The final section covers a discussion of the impact of taxation on the firm’s financial activities. PMF DISK This chapter’s topics are not covered on the PMF Tutor, PMF Problem-Solver, or the PMF Templates. Study Guide The following Study Guide example is suggested for classroom presentation: Example 1 3 Topic Earnings per share Income tax calculation ANSWERS TO REVIEW QUESTIONS 1-1 Finance is the art and science of managing money. Finance affects all individuals, businesses, and governments in the process of the transfer of money through institutions, markets, and instruments. Financial services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and government. Managerial finance encompasses the functions of budgeting, financial forecasting, credit administration, investment analysis, and funds procurement for the firm. Managerial finance is the management of the firm’s funds within the firm. This field offers many career opportunities, including financial analyst, capital budgeting analyst, and cash manager (Note: Other answers possible). 1-3 Sole proprietorships are the most common form of business organization, while corporations are responsible for the majority of business receipts and profits. Corporations account for the majority of business receipts and profits because they receive certain tax advantages and can expand more easily due to access to capital markets. Stockholders are the true owners, through equity in common and preferred stock, of a corporation. They elect the board of directors, which has the ultimate authority to guide corporate affairs and set general policy. The board is usually composed of key corporate personnel and outside directors. The president (CEO) reports to the board. He or she is responsible for day-to-day operations and carrying out policies established by the board. The owners of the corporation do not have a direct relationship with management but give their input through the election of board members and voting on major charter issues.

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