This Is Not Mine
Chapter
1
The Financial Environment: Firms, Investors, and Markets
L EARNING
LG1
G OALS
Define the term finance and explain why finance is relevant to students. Identify the components of the financial environment. Explain how investors monitor managers to ensure that managerial decisions are in the best interests of the owners. Describe how the financial environment has become internationalized.
LG2
LG3
LG4
1
2
LG1
What Is Finance?
Virtually all individuals and organizations earn or raise money and spend or invest money. Finance is the processes by which money is transferred (financing and investing) among businesses, individuals, and governments. The activities involved in the field of finance are evident in the financial news that is reported on television shows such as Money Line and in business periodicals such as the Wall Street Journal. Every day, financial decisions made within firms result in financial actions, such as those listed here, which were taken from the financial news: • Dell Computer expands its product line. • The Gap builds additional stores. • Nike closes a production plant in Asia. • Du Pont restructures its chemicals business. • Ford Motor Co. borrows $3 billion. • Motorola acquires a company in Japan. • Perot Systems issues stock valued at $3 billion. Note that each action reflects a decision on either how to invest funds or how to obtain funds. These financial actions are important not only to the firms involved but also to both existing and prospective investors in the firm. Financial decisions influence the value of the firm as reflected in its stock price, which affects how much investors earn on their investments in the firm. Thus many financial news headlines focus on the impact of a financial event on the firm’s stock price: • The stock price of Perot Systems rises by 50 percent within 2 days of its stock offering. • Nike’s stock price declines by 5 percent as a result of poor performance. • Apple
1
The Financial Environment: Firms, Investors, and Markets
L EARNING
LG1
G OALS
Define the term finance and explain why finance is relevant to students. Identify the components of the financial environment. Explain how investors monitor managers to ensure that managerial decisions are in the best interests of the owners. Describe how the financial environment has become internationalized.
LG2
LG3
LG4
1
2
LG1
What Is Finance?
Virtually all individuals and organizations earn or raise money and spend or invest money. Finance is the processes by which money is transferred (financing and investing) among businesses, individuals, and governments. The activities involved in the field of finance are evident in the financial news that is reported on television shows such as Money Line and in business periodicals such as the Wall Street Journal. Every day, financial decisions made within firms result in financial actions, such as those listed here, which were taken from the financial news: • Dell Computer expands its product line. • The Gap builds additional stores. • Nike closes a production plant in Asia. • Du Pont restructures its chemicals business. • Ford Motor Co. borrows $3 billion. • Motorola acquires a company in Japan. • Perot Systems issues stock valued at $3 billion. Note that each action reflects a decision on either how to invest funds or how to obtain funds. These financial actions are important not only to the firms involved but also to both existing and prospective investors in the firm. Financial decisions influence the value of the firm as reflected in its stock price, which affects how much investors earn on their investments in the firm. Thus many financial news headlines focus on the impact of a financial event on the firm’s stock price: • The stock price of Perot Systems rises by 50 percent within 2 days of its stock offering. • Nike’s stock price declines by 5 percent as a result of poor performance. • Apple