LO
Identify the key financial decisions facing the financial manager of any business firm.
Identify the basic forms of business organization in the United States and their respective strengths and weaknesses.
Describe the typical organization of the financial function in a large corporation.
Explain why maximizing the current value of the firm’s stock is the appropriate goal for management.
Discuss how agency conflicts affect the goal of maximizing stockholder value.
Explain why ethics is an appropriate topic in the study of corporate finance.


1.1THE ROLE OF THE FINANCIAL MANAGERwealth: the economic value of the assets someone possesses

stakeholder: anyone other than an owner (stockholder) with a claim on the cash flows of a firm, including employees,
suppliers, creditors, and the government
productive assets: the tangible and intangible assets a firm uses to generate cash flows, also known as long-term assets


capital budgeting—— The decision-making process through which the firm purchases long-term productive assets
residual cash flows： the cash remaining after a firm has paid operating expenses and what it owes creditors and
in taxes; can be paid to the owners as a cash dividend or reinvested in the business


Three Fundamental Decisions in Financial Management
1. Capital budgeting decisions: Identifying the productive assets the firm should buy.
2. Financing decisions: Determining how the firm should finance or pay for assets.
3. Working capital management decisions: Determining how day-to-day financial matters should be managed so that the firm can pay its bills, and how surplus cash should be invested.


capital structure
the mix of debt and equity that is used to finance a firm
capital markets
financial markets where equity and debt instruments with maturities greater than one year are traded

net working capital
the dollar difference between current assets and current liabilities


1.2 FORMS OF BUSINESS ORGANIZATION
sole proprietorship
a business owned by a single individual

partnership
two or more owners who have joined together legally to manage a business and share in its profits

limited liability
the legal liability of a limited partner or stockholder in a business, which extends only to the capital contributed or
the amount investedcorporation

corporation
a legal entity formed and authorized under a state charter; in a legal sense, a corporation is a “person” distinct from its owners


public markets
markets regulated by theSecurities and Exchange Commission in which large amounts of debt and equity are publicly traded
privately held (closely held) corporations
corporations whose stock is not traded in public markets


Hybrid Forms of Business Organization

limited liability partnerships (LLPs)
hybrid business organizations that combine some of the advantages of corporations and partnerships; in general, income to the partners is taxed only as personal income, but the partners have limited liability


equivalent forms： limited liability companies (LLCs) and professional corporations (PCs)

1.3 MANAGING THE FINANCIAL FUNCTION
chief financial officer (CFO)
the most senior financial manager in a company



Positions Reporting to the CFO

External Auditors

The Audit Committee

The Compliance and Ethics Director

1.4 THE GOAL OF THE FIRM
What Should Management Maximize?
Why Not Maximize Profits?
Maximize the Value of the Firm’s Stock-maximize the current value of owner’s equity
Can Management Decisions Affect Stock Prices?

1.5 AGENCY CONFLICTS: SEPARATION OF OWNERSHIP AND CONTROL
Ownership and Control

Agency Relationships
-agency conflicts-- conflicts of interest between a principal and an agent

Do Managers Really Want to Maximize Stock Price?
-agency costs-- the costs arising from conflicts of interest between a principal and an agent; for example,between a firm’s owners and its management


Aligning the Interests of Management and Stockholders
1)board of directors, (2) management compensation, (3) managerial labor market, (4) other managers, (5) large stockholders, (6) the takeover market, and (7) the legal and regulatory environment.


Sarbanes-Oxley and Other Regulatory Reforms
1. Ensure greater board independence
2. Establish internal accounting controls
3. Establish compliance programs
4. Establish an ethics program
5. Expand the audit committee’s oversight powers

1.6 THE IMPORTANCE OF ETHICS IN BUSINESS
Business Ethics
Are Business Ethics Different from Everyday Ethics?

Types of Ethical Confl icts in Business
-Agency Costs
-Conflicts of Interest
-Information Asymmetry--the situation in which one party in a business transaction has information that is unavailable to the other parties in the transaction

Serious Consequences