Chapter 1: Introduction to Financial Management
What Is Finance?
Goal of the Firm
Maximization of Shareholder Wealth
Legal Forms of Business Organization
Comparison of Organizational Forms
The Role of the Financial Manager in a Corporation
The Corporation and the Financial Markets: The Interaction
Ten Principles That Form the Basics of Financial Management
A Final Note on the Principles
Overview of the Text
Finance and the Multinational Firm: The New Role
In 1985, Harley-Davidson teetered only hours away from bankruptcy as one of Harley's largest lenders, Citicorp Industrial Credit, was considering bailing out on its loan. Since its beginning in 1903, the company survived two world wars, the great depression, and competition from countless competitors, but by the early 1980s, Harley had become known for questionable reliability and leaving oil stains on people's driveways. It looked for a while like the future was set, and Harley wouldn't be there. It looked like the future of motorcycles in America would feature only Japanese names like Honda, Yamaha, Kawasaki, and Suzuki. But none of that happened, and today Harley-Davidson stands, as President Reagan once proclaimed, as "an American success story." For a company in today's world, surviving one scare is not enough—today the business world involves a continuous series of challenges. As for Harley, it was a major accomplishment to make it through the 1980s, allowing it to face another challenge in the 1990s: a market that looked like it might disappear within a few years. How did Harley do against what looked like a shrinking market? It increased its motorcycle shipments from just over 60,000 in 1990 to over 200,000 in 2000! How have the shareholders done? Between 1986, when Harley-Davidson returned to public ownership with a successful stock offering, and 1999, Harley's stock price rose approximately 100-fold. How did Harley-Davidson, a company whose name grown men and women have tattooed on their arms and elsewhere, a company that conjures up images of burly bad boys and Easy Rider hippies in black leather jackets riding down the road, pull off one of the biggest business turnarounds of all time? Harley made good decisions. That's what we're going to look at in this book. We'll look at what it takes to turn Harley or any other company around. We'll look at how a company goes about making decisions to introduce new product lines. For example, in 2000, Harley-Davidson introduced the "Buell Blast," a low-cost, lightweight bike aimed at bringing new riders into the sport. How did it make this decision? We'll also follow Harley-Davidson throughout this book, examining how its experience fits in with the topics we are examining. In doing so, we will see that there are countless interactions among finance, marketing, management, and accounting. Because finance deals with decision making, it takes on importance, regardless of your major. Moreover, the tools, techniques, and understanding you will gain from finance will not only help you in your business career, but will also help you make educated personal investment decisions in the future.
What Is Finance?
Financial management is concerned with the maintenance and creation of economic value or wealth. Consequently, this course focuses on decision making with an eye toward creating wealth. As such, we will deal with financial decisions such as when to introduce a new product, when to invest in new assets, when to replace existing assets, when to borrow from banks, when to issue stocks or bonds, when to extend credit to a customer, and how much cash to maintain. To illustrate, consider two firms, Merck and General Motors (GM). At the end of 1998, the total market value of Merck, a large pharmaceutical company, was $153 billion. Over the life of the...
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