Ch 1 Learning Goals What is finance?

Ch 1 Learning GoalsCh 1 Learning Goals

What is finance?What do financial managers do?Relationships between finance &

economics/accountingWhat is the goal of financial decisions?

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What is finance?What is finance?

Finance studies the process of how organizations and individuals _________ ____________________________and ________________________________.

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FinanceFinance

Finance as a discipline can be broken down into:◦Managerial (Corporate) Finance◦Investments◦Financial Institutions◦Personal Finance◦Government (Public) Finance

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Finance 311Finance 311

Finance 311 is primarily about managerial finance, and to a lesser extent, personal finance.

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Managerial FinanceManagerial Finance

The financial manager manages the financial affairs of any organization.

Duties of financial managers:◦Financial _____________________◦Financial _____________________◦_____________________________ decisions◦_____________________________ decisions

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Duties of Financial ManagersDuties of Financial Managers

Financial analysis: evaluating financial ________________________________

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Duties of Financial ManagersDuties of Financial Managers

Financial planning: forecasting _______ _____________.

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Duties of Financial ManagersDuties of Financial Managers

Financing decisions: where __________ will come from

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Duties of Financial ManagersDuties of Financial Managers

Investment decisions: ◦how funds will be allocated◦what ________________ will be acquired

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Managerial Finance FunctionManagerial Finance Function

Relationship to Economics

The primary economic principal used in making financial decisions is marginal analysis: implement decisions if marginal __________________ exceed marginal ___________________.

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Managerial Finance FunctionManagerial Finance Function

Relationship to Accounting

The firm’s finance (treasurer) and accounting (controller) functions are closely related and overlapping.

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Managerial Finance FunctionManagerial Finance Function

Relationship to Accounting

In smaller firms, the financial manager generally functions as both treasurer & controller.

In bigger firms, the accounting function is under the Chief Financial Officer (CFO).

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Managerial Finance FunctionManagerial Finance Function

Relationship to Accounting

Much of the information relied on by financial managers is from accounting statements. However, accounting is based on the accrual method, while in finance the focus is on _____________________.

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Goal of the FirmGoal of the Firm

Goal of financial decisions: maximize shareholder wealth by maximizing the _______________________of the stock.

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Goal of the FirmGoal of the Firm

The market price of a firm’s stock reflects:◦Expected _______________________◦____________________ of the cash flows◦____________________ of the cash flows

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The Agency IssueThe Agency Issue

Do managers always act in shareholders’ best interests? Of course not.

(Why not?)

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The Agency IssueThe Agency Issue

The conflict of interest between managers and shareholders is an example of an agency conflict.

What keeps managers in line?

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