Part 1Part 1
Introduction to Managerial FinanceIntroduction to Managerial Finance
Chapters in this PartChapters in this Part
Chapter 1Chapter 1
The Role of Managerial FinanceThe Role of Managerial Finance
Chapter 2Chapter 2
The Financial Market EnvironmentThe Financial Market Environment
Integrative Case 1: Merit Enterprise Corp.Integrative Case 1: Merit Enterprise Corp.
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2012 Pearson Education, Inc. Publishing as Prentice Hall2012 Pearson Education, Inc. Publishing as Prentice Hall
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Principles of Managerial Finance,Principles of Managerial Finance,
Thirteenth EditionThirteenth Edition
Chapter 1Chapter 1
The Role of Managerial FinanceThe Role of Managerial Finance
ResouResou
rcesrces
OverviewOverview
This chapter introduces the student to the field of finance and explores career opportunities in both financialThis chapter introduces the student to the field of finance and explores career opportunities in both financial
services and managerial finance. services and managerial finance.
The three basic legal The three basic legal
forms of business organization (sole proprietorship,forms of business organization (sole proprietorship,
partnership, and corporation) and their strengths and weaknesses are described, as well as the relationshippartnership, 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 between major parties in a corporation. The managerial finance function is defined and
differentiated fromdifferentiated from
economics and accounting. The chapter then summarizes the three key economics and accounting. The chapter then summarizes the three key
activities of the financial manager:activities of the financial manager:
financial analysis and planning, investment decisions, and financing decisions. A discussion of the financialfinancial 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 manager’s goals—maximizing shareholder wealth and preserving stakeholder wealth—and the role
ofof
ethics in meeting these goals is presented. The chapter includes discussion of the agency problem—theethics 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 conflict that exists between managers and owners in a large
corporation.corporation.
This chapter, and all that follow, emphasize how the This chapter, and all that follow, emphasize how the
chapter content plays a vital role in the chapter content plays a vital role in the
student’sstudent’s
professional and personal life. Each chapter includes an early discussion of the relevance of professional and personal life. Each chapter includes an early discussion of the relevance of
the topic tothe topic to
majors in accounting, information systems, management, mmajors in accounting, information systems, management, m
arketing, and operations. Throughout eacharketing, and operations. Throughout each
chapter are detailed examples of how the chapter are detailed examples of how the
chapter’s topic relates to the student’s financial life. Thesechapter’s topic relates to the student’s financial life. These
pedagogic tools should motivate students to quickly grasp pedagogic tools should motivate students to quickly grasp
an understanding of the chapter an understanding of the chapter
content andcontent and
employ it in both their professional and personal lives.employ it in both their professional and personal lives.
If Zuckerberg is expected to remain the CEO of Facebook after the If Zuckerberg is expected to remain the CEO of Facebook after the
IPO, why would he be worriedIPO, why would he be worried
about going public?about going public?
Beyond the challenges arising from Beyond the challenges arising from
the influences of outside investors and the influences of outside investors and
government regulations, asgovernment regulations, as
mentioned in the case, there is mentioned in the case, there is
also the fact that his actions and the also the fact that his actions and the
firm’s financial statements would befirm’s financial statements would be
more accessible to the general public. more accessible to the general public.
While the public might reward him with a higher salary in goodWhile the public might reward him with a higher salary in good
years, there is a potential years, there is a potential
that he could be removed from othat he could be removed from o
ffice in bad years. ffice in bad years.
Also, Facebook would be aAlso, Facebook would be a
tantalizing company to many other firms, making it a tantalizing company to many other firms, making it a
takeover target.takeover target.
1.1.
FinanceFinance
is the art is the art
and science of managing money. Finance affects all and science of managing money. Finance affects all
individualsindividuals
, businesses, and, businesses, and
governments in the process of the transfer of mgovernments in the process of the transfer of m
oney through institutiooney through institutio
ns, markets, and instruments.ns, markets, and instruments.
At the personal level, finance is concerned with an At the personal level, finance is concerned with an
individual’s decisioindividual’s decisio
ns regarding the spending andns regarding the spending and
investing of income. investing of income.
Businesses also have to determine how to spend and inBusinesses also have to determine how to spend and in
vest revenues.vest revenues.
©©
2012 Pearson Education, Inc. Publishing as Prentice Hall2012 Pearson Education, Inc. Publishing as Prentice Hall
InstructoInstructo
r’s r’s
Suggested Answer toSuggested Answer to
Opener in ReviewOpener in Review
QuestionQuestion
Answers to Review QuestionsAnswers to Review Questions
2.2.
Financial servicesFinancial services
is the area is the area
of finance concerned with the design and delivery of advice andof finance concerned with the design and delivery of advice and
financial products to financial products to
individuals, businessesindividuals, businesses
, and , and
government.government.
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Principles of Managerial Finance,Principles of Managerial Finance,
Thirteenth EditionThirteenth Edition
ManMan
agerager
ial ial
finfin
anceance
encompasses the functions of budgeting, financial forecasting, credit administration,encompasses the functions of budgeting, financial forecasting, credit administration,
investment analysis, and funds procurement for the firm. Managerial finance is the minvestment analysis, and funds procurement for the firm. Managerial finance is the m
anagement ofanagement of
the firm’s funds within the firm. This field the firm’s funds within the firm. This field
offers many career opportunities, including financialoffers many career opportunities, including financial
analyst, capital budgeting analyst, and cash manager. (analyst, capital budgeting analyst, and cash manager. (
Note:Note:
Other answers possible.)Other answers possible.)
3.3.
Sole proprSole propr
ietorships ietorships
are the are the
most common most common
form of form of
business business
organization, organization,
while corpowhile corpo
rations arerations are
responsible for the majority of business receipts and profits. Corporations account for the majority ofresponsible 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 business receipts and profits because they receive certain tax advantages and can expand more
easilyeasily
due to access to capital markets.due to access to capital markets.
4.4.
StockStock
holdhold
ers are the true owers are the true ow
ners, thners, th
rough eqrough eq
uity in comuity in com
mon and prefmon and pref
erred sterred st
ock, of a corporock, of a corpor
atioatio
n.n.
They elect the board of directors, which has They elect the board of directors, which has
the ultimate authority to guide corporate affairs and setthe ultimate authority to guide corporate affairs and set
general policy. The board is usually composed of key corporate personnel and outside directors. Thegeneral 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-daypresident 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 notoperations 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 membershave a direct relationship with management but give their input through the election of board members
and voting on major charter issues. The owners of and voting on major charter issues. The owners of
the firm are compensated through the receipt ofthe firm are compensated through the receipt of
cash dividends paid by the firm or cash dividends paid by the firm or
by realizing capital gains through increases in the price of theirby realizing capital gains through increases in the price of their
common stock shares.common stock shares.
5.5.
The most poThe most po
pulapula
r form of limiter form of limite
d liabid liabi
lity orglity org
anizaniz
ationation
s other than cos other than co
rporarpora
tiontion
s are:s are:
Limited partnerships—A partnership with at least one Limited partnerships—A partnership with at least one
general partner with unlimited liability andgeneral partner with unlimited liability and
one or more limited partners who have limited liability. In return for the limited liability, the limitedone 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.partners are prohibited from active management of the partnership.
S corporation—If certain requirements are met, the S S corporation—If certain requirements are met, the S
corporation can be taxed as a corporation can be taxed as a
partnershippartnership
but receive most of the benefits of but receive most of the benefits of
the corporate form of organization.the corporate form of organization.
Limited liability corporatioLimited liability corporatio
n (LLC)—This form of organization is like an n (LLC)—This form of organization is like an
S corporation in that itS corporation in that it
is taxed as a partnership but primarily functions like a is taxed as a partnership but primarily functions like a
corporation. The LLC differs from thecorporation. The LLC differs from the
S corporation in that it is allowed to S corporation in that it is allowed to
own other corporations and be owned by other corporations,own other corporations and be owned by other corporations,
partnerships, and non-U.S. residents.partnerships, and non-U.S. residents.
Limited liability partnership (LLP)—A partnership form authorized by Limited liability partnership (LLP)—A partnership form authorized by
many states that gives themany states that gives the
partners limited liability from the acts of other partners, but not from partners limited liability from the acts of other partners, but not from
personal individual acts ofpersonal individual acts of
malpractice. The LLP is taxed as malpractice. The LLP is taxed as
a partnership. This form is most frequently used by legal anda partnership. This form is most frequently used by legal and
accounting professionals.accounting professionals.
These firms generally do not have large numbers These firms generally do not have large numbers
of owners. Most typically they have fewer thanof owners. Most typically they have fewer than
100 owners.100 owners.
6.6.
Virtually evVirtually ev
ery function ery function
within a within a
firm is ifirm is i
n some way n some way
connected wiconnected wi
th the receipth the receip
t or disbt or disb
ursementursement
of cash. The cash relationship may be of cash. The cash relationship may be
associated with the generation of sales through the marketingassociated with the generation of sales through the marketing
person within the firm needs to be person within the firm needs to be
knowledgeable of finance to effectively work with employeesknowledgeable of finance to effectively work with employees
of the financial of the financial
departments.departments.
Individuals plan, monitor, and assess the financial aspects of their activities over a given periodIndividuals plan, monitor, and assess the financial aspects of their activities over a given period
through the consideration of cash inflows through the consideration of cash inflows
and outflows.and outflows.
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ee
, and therefore all , and therefore all
managers, is to maximize shareholder wealth. This goal ismanagers, is to maximize shareholder wealth. This goal is
measured by share price; an increasing price per measured by share price; an increasing price per
share of common stock relative to the stock share of common stock relative to the stock
marketmarket
as a whole indicates achievement of this goal.as a whole indicates achievement of this goal.
