The Role of Managerial Finance
Chapter Number Chapter 1
Subject COF
The Role of Managerial Finance 1
, 📖 Table of Contents
Outline
1.1 Finance and the Firm
WHAT IS THE GOAL OF THE FIRM?
Maximize Shareholder Wealth
Maximize Profit?
Maximize Stakeholders’ Welfare?
THE ROLE OF BUSINESS ETHICS
1.2 Managing the Firm
THE MANAGERIAL FINANCE FUNCTION
Financial Managers’ Key Decisions
Principles That Guide Managers’ Decisions
Organization of the Finance Function
Relationship to Economics
1.3 Organization Forms, Taxation, and the Principal-Agent Relationship
LEGAL FORMS OF BUSINESS ORGANIZATION
Business Organizational Forms and Taxation
Other Limited Liability Organizations
AGENCY PROBLEMS AND AGENCY COSTS
CORPORATE GOVERNANCE
Internal Corporate Governance Mechanisms
External Corporate Governance Mechanisms
1.1 Finance and the Firm
📍 Finance is the science and art of how individuals and firms raise, allocate,
and invest
money.
📍 Managerial finance is concerned with the responsibilities of a financial
manager working in a business.
WHAT IS THE GOAL OF THE FIRM?
Maximize Shareholder Wealth
The Role of Managerial Finance 2
, The simplest and best measure of stockholder wealth is the share price.
Enriching shareholders requires managers to first satisfy the demands of these other
interest groups —> Dividends ultimately received by stockholders come from the
firm’s profits.
To determine whether a particular course of action will increase or decrease
shareholders’ wealth, managers have to assess what return (i.e., cash inflows net of
cash out-flows) and risk (i.e., the uncertainty of the net cash flows) the action will
bring.
Maximize Profit?
Corporations commonly measure profits in terms of earnings per share (EPS)
📍 Earnings Per Share (EPS): The amount earned during the period on
behalf of each outstanding share of stock. Calculated by dividing the
period’s total earnings available for the firm’s stockholders by the number
of shares of stock outstanding.
Figure 1.1
Reasons why profit maximization doesn’t always lead to the highest possible share
price
1. Timing: An investment that provides a small profit quickly may be preferable to
one that produces a larger profit if that profit comes in the distant future.
2. Cash Flows: Profits do not necessarily result in cash flows available to
stockholders. The accounting assumptions and techniques that a firm adopts
can sometimes allow it to show a positive profit even when its cash outflows
exceed cash inflows.
3. Risk: Profit maximization also fails to account for risk, the chance that actual
outcomes may differ from those expected. Investors demand higher returns on
The Role of Managerial Finance 3
Chapter Number Chapter 1
Subject COF
The Role of Managerial Finance 1
, 📖 Table of Contents
Outline
1.1 Finance and the Firm
WHAT IS THE GOAL OF THE FIRM?
Maximize Shareholder Wealth
Maximize Profit?
Maximize Stakeholders’ Welfare?
THE ROLE OF BUSINESS ETHICS
1.2 Managing the Firm
THE MANAGERIAL FINANCE FUNCTION
Financial Managers’ Key Decisions
Principles That Guide Managers’ Decisions
Organization of the Finance Function
Relationship to Economics
1.3 Organization Forms, Taxation, and the Principal-Agent Relationship
LEGAL FORMS OF BUSINESS ORGANIZATION
Business Organizational Forms and Taxation
Other Limited Liability Organizations
AGENCY PROBLEMS AND AGENCY COSTS
CORPORATE GOVERNANCE
Internal Corporate Governance Mechanisms
External Corporate Governance Mechanisms
1.1 Finance and the Firm
📍 Finance is the science and art of how individuals and firms raise, allocate,
and invest
money.
📍 Managerial finance is concerned with the responsibilities of a financial
manager working in a business.
WHAT IS THE GOAL OF THE FIRM?
Maximize Shareholder Wealth
The Role of Managerial Finance 2
, The simplest and best measure of stockholder wealth is the share price.
Enriching shareholders requires managers to first satisfy the demands of these other
interest groups —> Dividends ultimately received by stockholders come from the
firm’s profits.
To determine whether a particular course of action will increase or decrease
shareholders’ wealth, managers have to assess what return (i.e., cash inflows net of
cash out-flows) and risk (i.e., the uncertainty of the net cash flows) the action will
bring.
Maximize Profit?
Corporations commonly measure profits in terms of earnings per share (EPS)
📍 Earnings Per Share (EPS): The amount earned during the period on
behalf of each outstanding share of stock. Calculated by dividing the
period’s total earnings available for the firm’s stockholders by the number
of shares of stock outstanding.
Figure 1.1
Reasons why profit maximization doesn’t always lead to the highest possible share
price
1. Timing: An investment that provides a small profit quickly may be preferable to
one that produces a larger profit if that profit comes in the distant future.
2. Cash Flows: Profits do not necessarily result in cash flows available to
stockholders. The accounting assumptions and techniques that a firm adopts
can sometimes allow it to show a positive profit even when its cash outflows
exceed cash inflows.
3. Risk: Profit maximization also fails to account for risk, the chance that actual
outcomes may differ from those expected. Investors demand higher returns on
The Role of Managerial Finance 3
