Part 1
Introduction to Managerial Finance
Chapters in this Part
Chapter 1 The Role of Managerial Finance
Chapter 2 The Financial Market Environment
Integrative Case 1: Merit Enterprise Corp.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
1 Gitman/Zutter • Principles of Managerial Finance, Thirteenth Edition
Chapter 1
The Role of Managerial Finance
Instructor’s Resources
Overview
This chapter introduces the student to the field of finance and explores career opportunities in both financial
services and managerial finance. The three basic legal forms of business organization (sole proprietorship,
partnership, and corporation) and their strengths and weaknesses are described, as well as the relationship
between major parties in a corporation. The managerial finance function is defined and differentiated from
economics and accounting. The chapter then summarizes the three key activities of the financial manager:
financial analysis and planning, investment decisions, and financing decisions. A discussion of the financial
manager’s goals—maximizing shareholder wealth and preserving stakeholder wealth—and the role of
ethics in meeting these goals is presented. The chapter includes discussion of the agency problem—the
conflict that exists between managers and owners in a large corporation.
This chapter, and all that follow, emphasize how the chapter content plays a vital role in the student’s
professional and personal life. Each chapter includes an early discussion of the relevance of the topic to
majors in accounting, information systems, management, marketing, and operations. Throughout each
chapter are detailed examples of how the chapter’s topic relates to the student’s financial life. These
pedagogic tools should motivate students to quickly grasp an understanding of the chapter content and
employ it in both their professional and personal lives.
Suggested Answer to
Opener in Review
Question
If Zuckerberg is expected to remain the CEO of Facebook after the IPO, why would he be worried
about going public?
Beyond the challenges arising from the influences of outside investors and government regulations, as
mentioned in the case, there is also the fact that his actions and the firm’s financial statements would be
more accessible to the general public. While the public might reward him with a higher salary in good
years, there is a potential that he could be removed from office in bad years. Also, Facebook would be a
tantalizing company to many other firms, making it a takeover target.
Answers to Review Questions
1. Finance is the art and science of managing money. Finance affects all individuals, businesses, and
governments in the process of the transfer of money through institutions, markets, and instruments.
At the personal level, finance is concerned with an individual’s decisions regarding the spending and
investing of income. Businesses also have to determine how to spend and invest revenues.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
2. Financial services is the area of finance concerned with the design and delivery of advice and
financial products to individuals, businesses, and government.
© 2012 Pearson Education, Inc. Publishing as Prentice Hall
3 Gitman/Zutter • Principles of Managerial Finance, Thirteenth Edition
Managerial finance encompasses the functions of budgeting, financial forecasting, credit administration,
investment analysis, and funds procurement for the firm. Managerial finance is the management of
the firm’s funds within the firm. This field offers many career opportunities, including financial
analyst, capital budgeting analyst, and cash manager. (Note: Other answers possible.)
3. Sole proprietorships are the most common form of business organization, while corporations are
responsible for the majority of business receipts and profits. Corporations account for the majority of
business receipts and profits because they receive certain tax advantages and can expand more easily
due to access to capital markets.
4. Stockholders are the true owners, through equity in common and preferred stock, of a corporation.
They elect the board of directors, which has the ultimate authority to guide corporate affairs and set
general policy. The board is usually composed of key corporate personnel and outside directors. The
president or chief executive officer (CEO) reports to the board. He or she is responsible for day-to-day
operations and carrying out policies established by the board. The owners of the corporation do not
have a direct relationship with management but give their input through the election of board members
and voting on major charter issues. The owners of the firm are compensated through the receipt of
cash dividends paid by the firm or by realizing capital gains through increases in the price of their
common stock shares.
5. The most popular form of limited liability organizations other than corporations are:
Limited partnerships—A partnership with at least one general partner with unlimited liability and
one or more limited partners who have limited liability. In return for the limited liability, the limited
partners are prohibited from active management of the partnership.
S corporation—If certain requirements are met, the S corporation can be taxed as a partnership
