The Role and Environment of Managerial Finance

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CHAPTER 1
THE ROLE AND ENVIRONMENT OF MANAGERIAL FINANCE

Learning Goals

1. Define finance, the major areas of finance, and the career opportunities available in this field, and the legal forms of business organization. 2. Describe the managerial finance function and its relationship to economics and accounting. 3. Identify the primary activities of the financial manager within the firm. 4. Explain why wealth maximization, rather than profit maximization, is the firm’s goal and how the agency issue is related to it. 5. Understand the relationship between financial institutions and markets, as well as the role and operations of the money and capital markets. 6. Discuss the fundamentals of business taxation of ordinary income and capital gains, and explain the treatment of tax losses. 7.

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1. What is Finance?

- Finance can be defined as the art and science of managing money. - Levels of study:

a) Macro Level:

At the macro level, finance is the study of financial institutions and financial markets and how they operate within the financial system in both the local and global economies.

b) Micro Level:

At the micro level, finance is the study of financial planning, asset management, and fund raising for businesses and financial institutions.

- Financial Management (in the micro sense) can be described as follows:

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2. Major Areas in Finance and opportunities in Finance

- A well-developed financial system is a hallmark and essential characteristic of any modern developed nation.

- Financial markets, financial intermediaries, and financial management are the important components.

- Financial markets and financial intermediaries facilitate the flow of funds from borrowers to savers.

- Financial management involves the efficient use of financial resources in the production of goods.

- The opportunities can be classified into two parts:

a) Financial Services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and government. Career opportunities include banking, personal financial planning, investments, real estate, and insurance.

b) Managerial finance is concerned with the duties of the financial manager in the business firm.

The financial manager actively manages the financial affairs of any type of business, whether private or public, large or small, profit-seeking or not-for-profit. They perform varied financial tasks such as: i) Planning

ii) Extending credit
iii) Evaluating proposed large capital expenditures iv) Raising money for the firm’s operations, etc

Increasing globalization has complicated the financial management function by requiring the managers to take account of exchange rates and other risks like political risks of foreign countries.

Changing economic and regulatory conditions also complicate the financial management function.

3. Basic Forms of Business Organization

Three most common legal forms:

a) Sole Proprietorship: A business owned by one person and operated for his/her personal profit.

- Examples: an electrician, a bakery shop, a mechanic, a tailor, a plumber, etc.

- 75% of all business firms belong to this form.

- The common industries where sole proprietorship is found are: Wholesale, retail, service and construction.

b) Partnership: A business owned by two or more people and operated for profit.

- This form accounts for about 10 % of all...
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