Chapter 1 Overview of Financial Management & Environment

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CHAPTER 1
Overview of Financial Management & Environment
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Overview of Financial Management
Role of financial management Forms of business organization Goals of the corporation Agency relationships

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All Successful Firms Accomplish 2 Goals
They identify, create, & deliver products or services that are highly valued
This happens only if the firm provides more value than its competitors (in the form of either lower prices or better products)

They sell at prices high enough to cover costs and to compensate owners and creditors for their exposure to risk
The profit must be high enough to adequately 1-3 compensate investors

3 Key Attributes for Success
1. 2.

Skilled People at all levels
Leaders, managers and work force

Strong
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s’s liabilities Their potential losses are limited to their investment This increase the risk faced by an LLP’s lender, customers, and suppliers
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Corporation
Many owners Legal entity created by a state, and it is separate and distinct from its owners and managers

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Corporation
Advantages:
Unlimited life
A corporation can continue after its original owners and managers are deceased

Easy transfer of ownership
Ownership interests can be divided into shares of stock, which can be transferred easily

Limited liability
Losses are limited to the actual funds invested

Ease of raising capital

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Corporation
Disadvantages:
Corporate earnings may be subject to double taxation
The earnings of the corporation are taxed at the corporate level, and then earnings paid out as dividends are taxed again as income to the stock holders

Cost of set-up and report filing
Setting up a corporation involves preparing a charter, writing a set of bylaws and filling the many required reports
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Corporation
Charter: Establishing Separate Legal Entity
Name Activities Amount of Capital Stock Number of Directors Names & Addresses of Directors

Bylaws: Rules for conduct of Activities
How Directors will be elected Preemptive Right to new stock issues Procedures for changing Bylaws, if required
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Goals of the Corporation
The primary goal is shareholder wealth maximization, which translates to maximizing stock price

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Factors that affect stock price
Projected cash flows to

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