The Role and Objective of Financial Management
Key Chapter Concepts
- The most important forms of business organization are the
a. Sole proprietorship
b. Partnership —both limited and general
- Corporations have the advantages of limited liability for owners, potentially perpetual life, and the ability to raise large amounts of capital. Even though they account for only 20 percent of U.S. firms, corporations account for over 90 percent of U.S. business revenues.
- Shareholder wealth is defined as the present value of the expected future returns to the owners of the firm. It is measured by the market value of the shareholders’ common stock holdings.
- The primary normative goal of the firm is to maximize shareholder wealth. Achievement of the shareholder wealth maximization goal is often constrained by social responsibility concerns and problems arising out of agency relationships.
- The market value of a firm’s stock is determined by the magnitude, timing, and risk of the cash flows the firm is expected to generate. Managers can take a variety of actions to influence the magnitude, timing, and risk of the firm’s cash flows.These actions are often classified as investment, financing, and dividend decisions.
- Cash flow is a fundamental concept in finance and a focus of financial managers who are concerned with raising cash to invest in assets that will generate future cash flows for the firm and its owners.
- The net present value rule is the primary decision -making rule used throughout the practice of financial management.
a. The net present value of an investment is equal to the present value of future returns minus the required initial outlay.
b. The net present value of an investment made by a firm represents the contribution of that investment to the value of the firm and, accordingly, to the wealth of shareholders.
- Ethical standards of performance are an increasingly important dimension of the decision -making process of managers.
- The finance function is usually headed by a vice president or chief financial officer.
a. Financial management responsibilities are often divided between the controller and treasurer.
b. The controller normally has responsibility for all activities related to accounting.
c. The treasurer is normally concerned with the acquisition, custody, and expenditure of funds.
Corporate restructuring encompasses a broad array of activities that include changes in the ownership, asset structure, and/or capital structure of a company. The goal of any corporate restructuring should be to maximize shareholder wealth. This chapter focuses on a number of other forms of corporate restructuring, including external expansion (mergers) and business failure (bankruptcy). The next three sections examine mergers, and the final two sections discuss bankruptcy.