Summary_Principles_of_Managerial_Finance___Chapters_1_10. FIN2601 COMPLETE PACK.

Principles of Managerial Finance Solution Lawrence J. Gitman PART 1 Introduction to Managerial Finance CHAPTERS IN THIS PART 1 The Role and Environment of Managerial Finance 2 Financial Statements and Analysis 3 Cash Flow and Financial Planning lOMoARcPSD| CHAPTER 1 The Role and Environment 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. Money and capital markets and their major components are introduced in this chapter. The final section covers a discussion of the impact of taxation on the firm's financial activities. PMF DISK This chapter's topics are not covered on the PMF Tutor, PMF Problem-Solver, or the PMF Templates. Study Guide The following Study Guide example is suggested for classroom presentation: Example Topic 1 Earnings per share 3 Income tax calculation lOMoARcPSD| Chapter 1 The Role and Environment of Managerial Finance ANSWERS TO REVIEW QUESTIONS 1-1 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. 1-2 Financial services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and government. 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). 1-3 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. 1-4 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 (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. 1-5 The most popular form of limited liability organizations other than corporations are: ¾ Limited partnerships – A partnership with at least one general partner with unlimited liability and one or more limited partners that have limited liability. In return for the limited liability, the limited partners are prohibited from active management of the partnership. ¾ S corporation – If certain requirements are met, the S corporation can be taxed as a partnership but receive most of the benefits of the corporate form of organization. ¾ Limited liability corporation (LLC) – This form of organization is like an S corporation in that it is taxed as a partnership but primarily functions like a corporation. The LLC differs from the S lOMoARcPSD| Chapter 1 The Role and Environment of Managerial Finance 1-7 The treasurer or financial manager within the mature firm must make decisions with respect to handling financial planning, acquisition of fixed assets, obtaining funds to finance fixed assets, managing working capital needs, managing the pension fund, managing foreign exchange, and distribution of corporate earnings to owners. 1-8 Finance is often considered a form of applied economics. Firms operate within the economy and must be aware of economic principles, changes in economic activity, and economic policy. Principles developed in economic theory are applied to specific areas in finance. From macroeconomics comes the institutional structure in which money and credit flows take place. From microeconomics, finance draws the primary principle used in financial management, marginal analysis. Since this analysis of marginal benefits and costs is a critical component of most financial decisions, the financial manager needs basic economic knowledge. 1-9 a. Accountants operate on an accrual basis, recognizing revenues at the point of sale and expenses when incurred. The financial manager focuses on the actual inflows and outflows of cash, recognizing revenues when actually received and expenses when actually paid. b. The accountant primarily gathers and presents financial data; the financial manager devotes attention primarily to decision making through analysis of financial data. 1-10 The two key activities of the financial manager as related to the firm’s balance sheet are: (1) Making investment decisions: Determining both the most efficient level and the best mix of assets; and (2) Making financing decisions: Establishing and maintaining the proper mix of short- and long-term financing and raising needed financing in the most economical fashion. Making investment decisions concerns the left-hand side of the balance sheet (current and fixed assets). Making financing decisions deals with the right-hand side of the balance sheet (current liabilities, longterm debt, and stockholders' equity). 1-11 Profit maximization is not consistent with wealth maximization due to: (1) the timing of earnings per share, (2) earnings which do not represent cash flows available to stockholders, and (3) a failure to consider risk. 1-12 Risk is the chance that actual outcomes may differ from expected outcomes. Financial managers must consider both risk and return because of their inverse effect on the share price of the firm. Increased risk