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Business Finance. Chapter 1. Financial management is concerned with managing a corporation’s money Where to invest money Whether or not to replace an asset When to issue new stocks or bonds How to raise money. Functions of Financial Management. Allocate funds to current and fixed assets

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Business finance

Business Finance

Chapter 1


Business finance


Functions of financial management
Functions of Financial Management corporation’s money

  • Allocate funds to current and fixed assets

  • Obtain best mix of financing

  • Develop an appropriate dividend policy

  • Acquire new funds

  • Credit management

  • Inventory control

  • Receipt and disbursements of funds


Possible goals of financial management
Possible Goals of Financial Management corporation’s money

  • Earn the highest profit

  • Increase the value of the firm

  • Maximize shareholder wealth

  • Maximize management wealth

  • Act in a socially responsible or ethical manner


Forms of business organization
Forms of Business Organization corporation’s money

  • Sole proprietorship

  • Partnership

  • Corporation

    • Subchapter S


Sole proprietorship
Sole Proprietorship corporation’s money

  • Single person ownership

  • Unlimited liability for owner

  • Profits/losses taxed as though they belong to owner


Partnership
Partnership corporation’s money

  • Two or more owners

  • Unlimited liability for owners

  • Articles of partnership specify ownership interest, methods of distributing profits/losses, and means of withdrawal

  • Losses/profits allocated directly to partners


Corporation
Corporation corporation’s money

  • Legal entity

  • Formed through articles of incorporation

  • Owned by shareholders whose liability is limited to investment

  • Continual life

  • Easy division/transfer of ownership

  • Managed by a Board of Directors


Business finance

  • Pays taxes on its income corporation’s money

  • Remaining income is paid to shareholders as dividends

  • Shareholders pay taxes on dividends leading to double taxation

  • May form a Subchapter S Corporation to prevent double taxation


How will we see the difference
How will we see the difference? corporation’s money

  • Balance sheet – ownership

  • Raising funds

  • Dividends paid

  • Cash flow – owner’s draw


Agency theory
Agency Theory corporation’s money

  • Agents act on behalf of others

    • Ex: Real estate agents, sports agents

  • Relationship between the owners and managers of a firm

  • Two different groups in a public corporation

  • May cause conflicts of interests in running the company


Sarbanes oxley act
Sarbanes-Oxley Act corporation’s money

  • 2002 response to corporate scandals

  • Federal law drafted that increased regulation of corporations’ accounting practices and governance

  • Focus is to make sure that corporations present financial information accurately

  • Creates an Oversight Board that increases standards for auditing


Current issues in finance
Current Issues in Finance corporation’s money

  • Risk vs. return

  • Short–term vs. long-term

  • Raising money through stocks or bonds


Financial markets
Financial Markets corporation’s money

  • Meeting place for people, corporations, and institutions what need money or have money to lend or invest

    • Public financial markets – government that is borrowing for highways, education, welfare or other public activities

    • Corporate financial markets – corporations raising money


Business finance

  • What is bought or sold is called a “security” corporation’s money

  • An investment instrument issued by a corporation, government, or other organization which offers evidence of debt or equity

  • Securities include stocks, bonds, notes, options, calls, and leases


Business finance


Who are the primary participants in the capital markets
Who are the primary participants in the capital markets? a life of one year or less (ex: CD sold by a bank)

  • U.S. Treasury, other agencies of the federal, state and local gov’t, and corporations


Business finance


Competition for funds in the u s capital markets
Competition for Funds in the U.S. Capital Markets importance.

  • U.S. Treasury sells short/long term securities for financing

    • Treasury bills (or T-bills) -short-term securities that mature in one year or less from their issue date.

    • Interest paid as difference between purchase price and payment at maturity

      • For example, if you bought a $10,000 26-week Treasury bill for $9,750 and held it until maturity, your interest would be $250


Business finance


Business finance

  • Treasury bonds of interest every six months until maturity

    • http://finance.yahoo.com/bonds


Business finance

  • Corporations sell securities for funds also of interest every six months until maturity

    • Common stock – company sells ownership interest with voting rights to control company for capital

    • Preferred stocks - usually have a fixed dividend and carry no voting rights. They have priority over common stocks in the case of bankruptcy and with regard to dividends. They technically have an unlimited life but often are redeemable.


Business finance


Business finance

  • Securities are later traded by owners in security markets of interest every six months until maturity

  • Primary markets in the U.S. the New York Stock Exchange (NYSE) and the NASDAQ - American Stock Exchange (AMEX).

  • Exchanges of lesser importance include the Chicago, Pacific, Detroit, Boston, Cincinnati, and PBW (Philadelphia, Baltimore, and Washington) exchanges.

  • NASDAQ is electronic


Business finance


Regulation
Regulation of interest every six months until maturity

  • Organized securities markets are regulated by the Securities and Exchange Commission (SEC) and through self-regulation. 


Laws governing securities trading
Laws governing securities trading of interest every six months until maturity

  • Securities Act of 1933:  Requires full disclosure of all pertinent investment information on new corporate security issues.

  • Securities Exchange Act of 1934 - created the Securities and Exchange Commission (SEC) and empowered it to regulate securities markets.

  • Securities Acts Amendments of 1975 - Directed SEC to supervise development of national securities market


Which is most popular
Which is most popular? of interest every six months until maturity

  • Corporations tend to raise funds through debt more often than equity