Chapter 01 – Introduction to Financial Management
CHAPTER 1 − INTRODUCTION TO FINANCIAL MANAGEMENT
Questions
LG1 1. Describe the type of people who use the financial markets.
LG1 2. What is the purpose of financial management? Describe the kinds of activities that
financial management involves.
LG2 3. What is the difference in perspective between finance and accounting?
LG3 4. What personal decisions can you think of that will benefit from learning finance?
LG4 5. What are the three basic forms of business ownership? What are the advantages and
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Chapter 01 – Introduction to Financial Management
LG4 6. Between the three basic forms of business ownership, describe the ability of each form to
access capital.
LG4 7. Explain how the founder of a business can eventually lose control of the firm. How can
the founder ensure this will not happen?
LG5 8. Explain the shareholder wealth maximization goal of the firm and how it can be
measured. Make an argument for why it is a better goal than maximizing profit.
LG5 9. Name and describe as many corporate stakeholders as you can.
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Chapter 01 – Introduction to Financial Management
LG6 10. What conflicts of interest can arise between managers and stockholders?
LG6 11. Figure 1-9 shows firm monitors. In your opinion, which group is in the best position to
monitor the firm? Explain. Which group has the potential to be the weakest monitor?
Explain.
LG6 12. In recent years, governments all over the world have passed laws that increased the
penalties for executives’ crimes. Do you think this will deter unethical corporate managers?
LG6 13. Every year, the media reports on the vast amounts of money (sometimes hundreds of
millions of dollars) that some CEOs earn from the companies they manage. Are these CEOs
worth it? Give examples.
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LG7 14. Why is ethical behavior so important in the field of finance?
LG7 15. Does the goal of shareholder wealth maximization conflict with behaving ethically?
Explain.
LG8 16. Describe how financial institutions and markets facilitate the expansion of a company’s
business?
Research It!
Corporate Governance
The corporate governance system continues to evolve. After the very visible governance
failures in the early 2000s, the national focus was placed on this issue. The U.S.
government passed new laws regarding auditing, board of directors’ composition, and
executive behavior. Directors also began to change the form of executive incentive
compensation. Some believe the changes went too far and have placed a costly burden on
public corporations. Others believe that some new laws did not go far enough to reign in
the extreme levels of executive compensation. For information on this ongoing debate, visit
the leading independent source for U.S. corporate governance and executive compensation,
The Corporate Library at www.thecorporatelibrary.com.
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Integrated Mini-case: Corporate Citizenship
What is a company’s responsibility to society? Proponents of the modern view of
stakeholder theory argue that companies have a social obligation to operate in ethically,
socially, and environmentally responsible ways. This active approach is referred to as
corporate social responsibility (CSR) or corporate citizenship. The idea of corporate
citizenship is that a firm should conduct its business in a manner that meets its economic,
legal, ethical, and philanthropy expectations.
The economic responsibilities have the highest priority. A firm must be efficient and
survive over the long term in order to be useful to society. It must also execute its business
activities in a legal and ethical way. These responsibilities are those over and above the ones
codified in laws and are in line with societal norms and customs. They are expected, by
society even though they may be ill-defined. This could include things such as
environmental ethics. Philanthropy is the least important priority. The corporate citizenship
concept focuses more on engagement with stakeholders to achieve mutual goals.
Some corporations have responded to this trend by including CSR-oriented
statements in their corporate goals. These statements recognize that CSR has value in a code
of conduct or ethics, a commitment to local communities, an interest in employee health and
education, an environmental consciousness, and recognition of social issues (e.g. diversity,
social fairness, etc.). In October of 2006, The Conference Board surveyed large U.S. firms
on corporate citizenship issues, 198 firms responded. When asked about the top 3 CSR
topics receiving attention at the company, the results were:
Chapter 01 – Introduction to Financial Management
What is the motivation for these companies to fund CSR programs? When asked, 92
percent stated that enhancing corporate reputation was very important. Other popular
responses were for recruiting and retention (78 percent), reducing risk (65 percent).
a. Wal-Mart generates over $11 billion in profits per year and is the largest corporate
employer in the U.S., with 1.4 million employees. But Wal-Mart also seems to be coming
under increasing pressure from different social groups for its business practices.
Community groups have worked to keep Wal-Mart from coming to their towns. Wal-Mart
claims that its low prices help everyone in the community. Also by giving over $270
million to charity last year, it is the largest corporate cash contributor in the United States.
Go to http://walmartwatch.org and describe the current stakeholder problems with Wal-
Mart. Also go to www.walmart.com and describe what Wal-Mart is doing to engage these
stakeholders. What is your opinion?
b. What activities might companies engage in to satisfy the four components of corporate
citizenship: economic, legal, ethical, and philanthropy?
c. By embracing citizenship goals, assess whether corporations can insulate themselves
from many activist actions, thereby avoiding negative media events.
SOLUTION:
a. Wake up Walmart.com summarizes its many complaints on its website with the following
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Chapter 01 – Introduction to Financial Management
c. Companies can insulate themselves to some degree by being aggressive in promoting its
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