The role and environment of managerial finance summary

Finance, its major areas and opportunities, and the legal forms of business organization

Finance is the art and science of managing money. It affects the life of every person and of every organization. Major opportunities in financial services exist within baking and related institutions, personal financial planning, investments, real estate, and insurance. Managerial finance is concerned with the duties of the financial manager in the business firm. It offers numerous career opportunities. The recent trend toward globalization of business activity has created new demands and opportunities in managerial finance.

The legal forms of business organization are the sole proprietorship, the partnership, and the corporation. The corporation is dominant in terms of business receipts and profits, and its owners are its common and preferred stockholders. Stockholders expect to earn a return by receiving dividends or by realizing gains through increases in share price.

Managerial finance function and its relationship to economics and accounting

All areas of responsibility within a firm interact with the finance personnel and procedures. The financial manager must understand the economic environment and relies heavily on the economic principle of marginal cost benefit analysis to make financial decisions. Financial managers use accounting a concentrate on cash flows and decision-making.

Primary activities of the financial manager

The primary activities of the financial manager, in addition to ongoing involvement in financial analysis and planning, are making investment decisions and making financial decisions.

Goal of the firm, corporate governance, the role of ethics, and the agency issue

The goal of the financial manager is to maximize the owner's wealth, as evidenced by stock price. Profit maximization ignores the timing of returns, does not directly consider cash flows, and ignores risk, said it is an inappropriate goal. Both return and risk must be assessed by the financial manager who is evaluating decision alternatives. The wealth maximizing actions of financial managers should also reflect the interests of stakeholders, groups that have a direct economic link to the firm.

The corporate governance structure is used to direct and control the corporation by defining the rights and responsibilities of key corporate participants. Both individual and institutional investors hold the stock of most companies, but the institutional investors tend to have a much greater influence on corporate governance. The Sarbanes-Oxley Act of 2002 (commonly called SOX) was passed to eliminate fraudulent financial disclosure and conflict of interest problems. Positive ethical practices help a firm and its managers to achieve the firm's goal of owner wealth maximization. SOX has provided impetus toward such practices.

An agency problem results from managers, as agents for owners, placed personal goals ahead of corporate goals. Market forces, in the form of shareholder activism and the threat of takeover, tend to prevent or minimize agency problems. Institutional investors often exert pressure on management to perform. Firms incur agency costs to maintain a corporate governance structure that monitors manager's actions and provides incentives for them to act in the best interests of owners. Stock options and performance plans are examples of such agency costs.

Financial institutions and markets, and the role they play in managerial finance

Financial institutions serve as intermediaries by channeling into loans or investments the savings of individuals, businesses, and governments. The financial markets are forums in which suppliers and demanders of funds can transact business directly. Financial institutions actively participate in the financial markets as both suppliers and demanders of funds.

In the money market, marketable securities (short-term debt instruments) are traded, typically through large New York banks and government securities dealers. The Eurocurrency market is the international equivalent of the domestic money market.

In the capital market, transactions in long-term debt (bonds) and equity (common and preferred stock) are made. The organized securities exchanges provide secondary markets for securities. The over-the-counter (OTC) exchange offers a secondary market for securities and is a primary market in which new public issues are sold. Important international debt and equity markets are the Eurobond market and the international equity market. The security exchanges create continuous liquid markets for needing financing and allocate funds to their most productive uses.

Business taxes and their importance in financial decisions

Corporate income is subject to corporate taxes. Corporate tax rates are applicable to both ordinary income (after deduction of allowable expenses) and capital gains. The average tax rate paid by a corporation ranges from 15 to 35%. Corporate taxpayers can reduce their taxes to certain provisions of the tax code: intercorporate dividend exclusions and tax-deductible expenses. A capital gain occurs when an asset is sold for more than its initial purchase price; they are added to ordinary corporate income and taxed at regular corporate rates.