Bethlehem University

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Part 1
Introduction to Managerial Finance

Chapters in this Part

Chapter 1The Role of Managerial Finance
Chapter 2The Financial Market Environment

Integrative Case 1: Merit Enterprise Corp.

Chapter 1
The Role 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.

This chapter, and all that follow, emphasize how the chapter content plays a vital role in the student’s professional and personal life. Each chapter includes an early discussion of the relevance of the topic to majors in accounting, information systems, management, marketing, and operations. Throughout each chapter are detailed examples of how the chapter’s topic relates to the student's financial life. These pedagogic tools should motivate students to quickly grasp an understanding of the chapter content and employ it in both their professional and personal lives.

( Suggested Answer to Opener in Review Question

If Zuckerberg is expected to remain the CEO of Facebook after the IPO, why would he be worried about going public?

Beyond the challenges arising from the influences of outside investors and government regulations, as mentioned in the case, there is also the fact that his actions and the firm’s financial statements would be more accessible to the general public. While the public might reward him with a higher salary in good years, there is a potential that he could be removed from office in bad years. Also, Facebook would be a tantalizing company to many other firms, making it a takeover target.

( Answers to Review Questions

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. At the personal level, finance is concerned with an individual’s decisions regarding the spending and investing of income. Businesses also have to determine how to spend and invest revenues.

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.)

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.

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...
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