Académique Documents
Professionnel Documents
Culture Documents
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The Managerial Finance Function
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• The significance of this difference
can be illustrated using the following simple example.
ACCRUAL CASH
Sales $100,000 $ 0
• The financial manager uses this data as a vital tool for making
decisions about the financial aspects of the firm.
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Goal of the Firm:
Maximize Shareholder Wealth!!!
• Why?
Required Return
Corporate Governance
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• The structure of corporate governance was previously described in
Figure 1.1.
• SOX:
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– strengthened accounting disclosure requirements;
• SOX:
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– Does the action affect the morals, or legal rights of any individual
or group?
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• Whenever a manager owns less than 100% of the firm’s equity, a
potential agency problem exists.
• However, managers are also concerned with their personal wealth, job
security, fringe benefits,
and lifestyle.
• This would cause managers to act in ways that do not always benefit
the firm shareholders.
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• Examples would include bonding or monitoring management behavior,
and structuring management compensation to make shareholders
interests their own.
• Firms that require funds from external sources can obtain them in
three ways:
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• The two key financial markets are the money market and the capital
market.
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• The capital market is a market that enables suppliers and demanders
of long-term funds to make transactions.
• The key capital market securities are bonds (long-term debt) and both
common and preferred stock (equity).
• They account for about 46% of the total dollar volume of domestic
shares traded.
• Only the largest and most profitable companies meet the requirements
necessary to be listed on the New York Stock Exchange.
• Only those that own a seat on the exchange can make transactions on
the floor (there are currently 1,366 seats).
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• The OTC is a computer-based market where dealers make a market
in selected securities and are linked to buyers and sellers through the
NASDAQ System.
• The foreign bond market is a market for foreign bonds, which are
bonds issued by a foreign corporation or government that is
denominated in the investor’s home currency and sold in the investor’s
home market.
Business Taxes
• Under current law, tax treatment of ordinary income and capital gains
income change frequently due frequently changing tax laws.
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• Example
• Tax = $15,450
Business Taxation:
Average & Marginal Tax Rates
• The average tax rate is the firm’s taxes divided by taxable income.
Business Taxation:
Tax on Interest & Dividend Income
Business Taxation:
Debt versus Equity Financing
• This creates a built-in tax advantage for using debt financing as the
following example will demonstrate.
• As the example shows, the use of debt financing can increase cash
flow and EPS, and decrease taxes paid.
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• It is the non-deductibility of dividends paid that results in double
taxation under the corporate form of organization.
• A capital gain results when a firm sells an asset such as a stock held
as an investment for more than its initial purchase price.
• The difference between the sales price and the purchase price is called
a capital gain.
• For corporations, capital gains are added to ordinary income and taxed
like ordinary income at the firm’s marginal tax rate.
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