Financial Management
, Topic 1
The Role of Managerial Finance
, What Is Finance?
Finance entails the science and art of managing money.
In a business level, finance involves how firms:
• Raise money from investors
• Invest money to earn profit
• Decide whether to reinvest profits in the business or distribute the
to investors
Managerial finance concerns the duties of the financial manager in
business.
What Is a Firm?
A firm is a business organization that sells goods or services.
Firms exist because investors seek risky investment opportunities
, What Is the Primary Goal of the Firm?
Maximize Shareholder Wealth
• Managers should maximize the wealth of the firm’s owners.
• In most instances this is equivalent to maximizing the stock price.
Maximize Profit?
• Does maximizing profit lead to the highest possible share price?
• For at least three reasons, the answer is often no due to: Timing, Cash Flows, Risk
Maximize Stakeholders’ Welfare?
• The need to balance the welfare of shareholders and other firm stakeholders
• Stakeholders include employees, suppliers, customers, and even members of the local community where a firm
• Flaws in neglecting shareholder wealth maximization in favor of stakeholder perspective:
• Maximizing shareholder wealth does not in any way imply that managers should ignore the interests of eve
connected to a firm who is not a shareholder
• To maximize shareholder value, managers must necessarily assess the long-term
• consequences of their actions
• The stakeholder perspective is intrinsically difficult to implement, and advocates of the idea that managers
consider all stakeholders’ interests along with those of shareholders do not typically indicate how managers
it out
• Many people misinterpret the statement that managers should maximize shareholder wealth as implying tha
should take any action, including illegal or unethical actions, that increases the stock price.
, Topic 1
The Role of Managerial Finance
, What Is Finance?
Finance entails the science and art of managing money.
In a business level, finance involves how firms:
• Raise money from investors
• Invest money to earn profit
• Decide whether to reinvest profits in the business or distribute the
to investors
Managerial finance concerns the duties of the financial manager in
business.
What Is a Firm?
A firm is a business organization that sells goods or services.
Firms exist because investors seek risky investment opportunities
, What Is the Primary Goal of the Firm?
Maximize Shareholder Wealth
• Managers should maximize the wealth of the firm’s owners.
• In most instances this is equivalent to maximizing the stock price.
Maximize Profit?
• Does maximizing profit lead to the highest possible share price?
• For at least three reasons, the answer is often no due to: Timing, Cash Flows, Risk
Maximize Stakeholders’ Welfare?
• The need to balance the welfare of shareholders and other firm stakeholders
• Stakeholders include employees, suppliers, customers, and even members of the local community where a firm
• Flaws in neglecting shareholder wealth maximization in favor of stakeholder perspective:
• Maximizing shareholder wealth does not in any way imply that managers should ignore the interests of eve
connected to a firm who is not a shareholder
• To maximize shareholder value, managers must necessarily assess the long-term
• consequences of their actions
• The stakeholder perspective is intrinsically difficult to implement, and advocates of the idea that managers
consider all stakeholders’ interests along with those of shareholders do not typically indicate how managers
it out
• Many people misinterpret the statement that managers should maximize shareholder wealth as implying tha
should take any action, including illegal or unethical actions, that increases the stock price.
