Chapter 1 Role of Managerial Finance pmf13

Chapter 1
The Role of
Managerial
Finance
Copyright © 2012 Pearson Prentice Hall.

All rights reserved.
COURSE DESCRIPTION
Business Finance is an examination of the

principles, theory and techniques of
modern corporate financial management.
Topics such as risk, return, valuation of
securities and projects, long-term financing
and the financial environment are
explored.
COURSE MATERIALS
Textbooks
– Gitman, Lawrence J., Chad J. Zutter, (2012) Principles of Managerial
Finance (13th ed.) Addison-Wesley, Reading MA.
– MyFinance Lab add-in
Supplemental Materials
– Notes and homework documents are accessed from MYTMC.
Computing / Software
– It is assumed that all students have a basic understanding of the use of
Excel spreadsheet.
– There is an Excel spreadsheet to download from the Handout section of
MYTMC.
– All individual homework and exams are completed via MyFinance LAB
EVALUATION CRITERIA /
GRADING POLICY
(70 - 100%) = Pass

(69 % or less)= F
If you have a documented physical or learning disability for which you require
special accommodations, please see;
Coordinator for Academic Student Support Services,
Administration Building Rm.3325,
(513) 344-3521
This includes students who have had accommodations from TMC in the past.
GRADE COMPOSITION
(TRADITIONAL)
Quizzes 50%
Homework 50%
Grades are based on the total number of

correct points achieved out of the total
possible.
The above percentages represent an
approximate distribution of the grading.
Career Opportunities in
Finance: Managerial Finance
• Managerial finance is concerned with the duties of the financial
manager working in a business.
• Financial managers administer the financial affairs of all types of
businesses—private and public, large and small, profit-seeking and
not-for-profit.
• They perform such varied tasks as developing a financial plan or
budget, extending credit to customers, evaluating proposed large
expenditures, and raising money to fund the firm’s operations.
• Very involved with strategic planning and implementation
© 2012 Pearson Prentice Hall. All rights reserved. 1-6

Managerial Finance (cont.)
• The recent global financial crisis and subsequent

responses by governmental regulators, increased global
competition, and rapid technological change also increase
the importance and complexity of the financial manager’s
duties.
• Increasing globalization has increased demand for
financial experts who can manage cash flows in different
currencies and protect against the risks that naturally arise
from international transactions.

Legal Forms of Business
Organization
• A sole proprietorship is a business owned by one person
and operated for his or her own profit.
• A partnership is a business owned by two or more
people and operated for profit.
• A corporation is an entity created by law. Corporations
have the legal powers of an individual in that it can sue
and be sued, make and be party to contracts, and acquire
property in its own name.
• Finance theories and techniques apply to all.

What is the Goal of the firm?
• Is there a benchmark that serves as an

appropriate measure of whether an action
should proceed or not?
• Maximize profit
• Minimize expenses
• Maximize marketing share
• Maximize share price
• Maximize stakeholder wealth

Goal of the Firm:
Maximize Shareholder Wealth
Decision rule for managers: only take actions that are
expected to increase the share price.

Goal of the Firm:
Maximize Shareholder Wealth!!!
Why?
Because maximizing shareholder wealth properly considers
cash flows, the timing of these cash flows, and the risk of
these cash flows.
– This is primarily what the owners want
This can be illustrated using the following simple stock
valuation equation: level & timing
of cash flows
Share Price = Future Dividends
Required Return risk of cash
flows
Goal of the Firm:
What About Stakeholders?
• Stakeholders are groups such as employees, customers,
suppliers, creditors, owners, and others who have a direct
economic link to the firm.
• A firm with a stakeholder focus consciously avoids
actions that would prove detrimental to stakeholders. The
goal is not to maximize stakeholder well-being but to
preserve it.
• Such a view is considered to be "socially responsible."

The Role of Business Ethics
• Business ethics are the standards of conduct or moral

judgment that apply to persons engaged in commerce.
• Violations of these standards in finance involve a variety
of actions: “creative accounting,” earnings management,
misleading financial forecasts, insider trading, fraud,
excessive executive compensation, options backdating,
bribery, and kickbacks.
• Negative publicity often leads to negative impacts on a
firm

The Role of Business Ethics:
Ethics and Share Price
Ethics programs seek to:
– reduce litigation and judgment costs
– maintain a positive corporate image
– build shareholder confidence
– gain the loyalty and respect of all stakeholders
The expected result of such programs is to positively affect
the firm’s share price.
Is there a place in business for the “Golden Rule”??

Managerial Finance Function:
Relationship to Economics
• Financial managers must understand the economic
framework and be alert to the consequences of varying
levels of economic activity and changes in economic
policy.
• They must also be able to use economic theories as
guidelines for efficient business operation.
• Marginal cost–benefit analysis is the economic principle
that states that financial decisions should be made and
actions taken only when the added benefits exceed the
added costs
Relationship to Accounting
• The firm’s finance and accounting activities are closely-
related and generally overlap.
• In small firms accountants often carry out the finance
function, and in large firms financial analysts often help
compile accounting information.
• One major difference in perspective and emphasis
between finance and accounting is that accountants
generally use the accrual method while in finance, the
focus is on cash flows.

Relationship to Accounting (cont.)
Finance and accounting also differ with respect to decision-
making:
– Accountants devote most of their attention to the collection and
presentation of financial data.
– Financial managers evaluate the accounting statements, develop
additional data, and make decisions on the basis of their
assessment of the associated returns and risks.

Governance and Agency:
Corporate Governance
• Corporate governance refers to the rules, processes, and
laws by which companies are operated, controlled, and
regulated.
• It defines the rights and responsibilities of the corporate
participants such as the shareholders, board of directors,
officers and managers, and other stakeholders, as well as
the rules and procedures for making corporate decisions.

Government Regulation
The Sarbanes-Oxley Act of 2002:
• established an oversight board to monitor the accounting industry;
• tightened audit regulations and controls;
• toughened penalties against executives who commit corporate fraud;
• strengthened accounting disclosure requirements and ethical guidelines for
corporate officers;
• established corporate board structure and membership guidelines;
• established guidelines with regard to analyst conflicts of interest;
• mandated instant disclosure of stock sales by corporate executives;
• increased securities regulation authority and budgets for auditors and investigators.

The Agency Issue
• A principal-agent relationship is an arrangement in
which an agent acts on the behalf of a principal. For
example, shareholders of a company (principals) elect
management (agents) to act on their behalf.
• Agency problems arise when managers place personal
goals ahead of the goals of shareholders.
• Agency costs arise from agency problems that are borne
by shareholders and represent a loss of shareholder
wealth.

The Agency Issue:
The Agency Problem
Whenever a manager owns less than 100% of the firm’s

equity, a potential agency problem exists.
In theory, managers would agree with shareholder wealth

maximization.
However, managers are also concerned with their personal

wealth, job security, fringe benefits, and lifestyle.
This would cause managers to act in ways that might not

always benefit the firm shareholders.

The Agency Issue:
Management Compensation Plans
• Incentive plans are management compensation plans that
tie management compensation to share price; one example
involves the granting of stock options.
• Performance plans tie management compensation to
measures such as EPS or growth in EPS. Performance
shares and/or cash bonuses are used as compensation
under these plans.

Options
• Option is the right to buy a stock at a certain

price within a certain period of time.
– Creates another place for people to acquire
company stock.
You have an option You have an option to buy a

to buy a share of share of stock at $50. After
stock at $50. The several years of good
current price is $35. management the price has
risen to $65.
Where would you buy? Where would you buy?

Matter of Fact—Forbes.com
CEO Performance vs. Pay

The Agency Issue: The Threat
of Takeover
• When a firm’s internal corporate governance structure is
unable to keep agency problems in check, it is likely that
rival managers will try to gain control of the firm.
• The threat of takeover by another firm, which believes it
can enhance the troubled firm’s value by restructuring its
management, operations, and financing, can provide a
strong source of external corporate governance.

Chapter 2 Financial
Market Environment

Commercial Banks, Investment Banks,
and the Shadow Banking System
• The Glass-Steagall Act was an act of Congress in 1933

that created the federal deposit insurance program and
separated the activities of commercial and investment
banks.
– Repealed in the late 1990s.
• The shadow banking system describes a group of
institutions that engage in lending activities, much like
traditional banks, but these institutions do not accept
deposits and are therefore not subject to the same
regulations as traditional banks.

Financial Institutions &
Markets: Financial Markets
• Financial markets are forums in which suppliers of funds
and demanders of funds can transact business directly.
• Transactions in short term marketable securities take place
in the money market while transactions in long-term
securities take place in the capital market.
• A private placement involves the sale of a new security
directly to an investor or group of investors.
• Most firms, however, raise money through a public
offering of securities, which is the sale of either bonds or
stocks to the general public.

Financial Institutions & Markets:
Financial Markets (cont.)
• The primary market is the financial market in which
securities are initially issued; the only market in which the
issuer is directly involved in the transaction.
• IPO
• Seasoned Shares
• Only time issuer gets funds from investors
• Secondary markets are financial markets in which pre-
owned securities (those that are not new issues) are traded.

Markets
• The money market is created by a financial relationship

between suppliers and demanders of short-term funds.
• marketable securities
• among the least risky investments available.
• The capital market is a market that enables suppliers and
demanders of long-term funds to make transactions.
• The key securities are bonds and both common and preferred
stock.

Broker Markets and
Dealer Markets
Broker markets are securities exchanges on which the two
sides of a transaction, the buyer and seller, are brought
together to trade securities.
– Trading takes place on centralized trading floors.
– NYSE
Dealer markets are markets in which the buyer and seller
are brought together indirectly via computers
– no centralized trading floors.
– The Nasdaq market is one example
– OTC
The Role of Capital Markets
• From a firm’s perspective, the role of capital markets is to be a liquid

market where firms can interact with investors in order to obtain
valuable external financing resources.
• From investors’ perspectives, the role of capital markets is to be an
efficient market that allocates funds to their most productive uses.
• An efficient market allocates funds to their most productive uses as
a result of competition among wealth-maximizing investors and
determines and publicizes prices that are believed to be close to their
true value.

Exchanges
• NYSE
• http://www.youtube.com/watch?v=TPUDPhpCec
A&feature=player_detailpage
• CBOE
• http://www.youtube.com/watch?v=_UXomMnQK
T4&feature=player_detailpage

Regulation of Financial Institutions and Markets:
Regulations Governing Financial Markets
• The Securities Act of 1933 regulates the sale of securities to the

public via the primary market.
– Requires sellers of new securities to provide extensive disclosures to the
potential buyers of those securities.
• The Securities Exchange Act of 1934 regulates the trading of
securities such as stocks and bonds in the secondary market.
– Created the Securities Exchange Commission, which is the primary
government agency responsible for enforcing federal securities laws.
– Requires ongoing disclosure by companies whose securities trade in
secondary markets (e.g., 10-Q, 10-K).
– Imposes limits on the extent to which “insiders” can trade in their firm’s
securities.

Business Taxes
• Both individuals and businesses must pay taxes on income.

• The income of sole proprietorships and partnerships is taxed as the
income of the individual owners, whereas corporate income is
subject to corporate taxes.
• Both individuals and businesses can earn two types of income—
ordinary income and capital gains income.
• Under current law, tax treatment of ordinary income and capital
gains income change frequently due frequently changing tax laws.

Table 2.1
Corporate Tax Rate Schedule

Calculate corporate taxes
Taxable income = 78,000

13,750 + .34 * 3,000 = 14,770
Average tax rate = 14,770 / 78,000 = 18.9%
Marginal tax rate = 34%
Taxable income = 17,000,000

5,150,000 + .38 * 2,000,000 = 5,910,000
Average tax rate = 5,910,000 / 17,000,000 = 34.7%
Marginal tax rate = 38%
Chapter 3 Statements
and Ratios

The Stockholders’ Report
• Generally accepted accounting principles (GAAP) are
the practice and procedure guidelines used to prepare and
maintain financial records and reports;
• The Sarbanes-Oxley Act of 2002, passed to eliminate the
many disclosure and conflict of interest problems of
corporations
• More Countries Adopt International Financial Reporting
Standards
– International Financial Reporting Standards (IFRS) are
established by the International Accounting Standards Board
(IASB).
The Four Key Financial Statements:
The Income Statement
• The income statement provides a financial summary of a
company’s operating results during a specified period.
• Although they are prepared quarterly for reporting
purposes, they are generally computed monthly by
management and quarterly for tax purposes.

Table 3.1 Bartlett Company
Income Statements ($000)
Concentrate on control issue

• Gross profit – control
expenses of production
• Operating profit – control
of the expenses of
“running” the company
• Net income – remaining
profits after all expenses
paid

The Four Key Financial
Statements: The Balance Sheet
• The balance sheet presents a summary of a firm’s
financial position at a given point in time.
• The statement balances the firm’s assets (what it owns)
against its financing, which can be either debt (what it
owes) or equity (what was provided by owners).

Table 3.2a Bartlett Company
Balance Sheets ($000)
Represents the assets that management has purchased

and uses to achieve it’s mission and goals.
Table 3.2b Bartlett Company
Balance Sheets ($000)
Represents how
management
gets the $$ to
purchase the
assets of the
firm.

Statement of Retained Earnings
The statement of retained earnings reconciles the net
income earned during a given year, and any cash dividends
paid, with the change in retained earnings between the start
and the end of that year.

Statement of Cash Flows
• The statement of cash flows provides a summary of the
firm’s operating, investment, and financing cash flows and
reconciles them with changes in its cash and marketable
securities during the period.
• This statement not only provides insight into a company’s
investment, financing and operating activities, but also ties
together the income statement and previous and current
balance sheets.

Table 3.4 Bartlett Company Statement of
Cash Flows ($000) for the Year Ended
December 31, 2012
The cash flow statement
illustrates the primary
decisions that managers
make.
• Managers make decisions
on how to run the
business (operations)
• Managers decide what
kinds of assets to buy
(investment)
• Managers decide where
to get the $$ to run the
business (financing)
Using Financial Ratios: Cautions
about Using Ratio Analysis
1. Ratios that reveal large deviations from the norm merely indicate
the possibility of a problem.
2. A single ratio does not generally provide sufficient information
from which to judge the overall performance of the firm.
3. The ratios being compared should be calculated using financial
statements dated at the same point in time during the year.
4. It is preferable to use audited financial statements.
5. The financial data being compared should have been developed in
the same way.
6. Results can be distorted by inflation.

Table 3.5 Financial Ratios for Select Firms
and Their Industry Median Values

Molson Coors (TAP)
Year 2002 2003 2004 2005 2006

Net Sales $3,776 $4,000 $4,305 $5,506 $5,844
Cost of Goods Sold $2,415 $2,587 $2,741 $3,307 $3,481
Gross Profit $1,361 $1,413 $1,564 $2,199 $2,363
Other Op Expenses $1,063 $1,106 $1,216 $1,777 $1,782
EBIT (Op Income) $298 $307 $348 $422 $581
Interest Exp (neg) -$70 -$81 -$72 -$131 -$143
Interest Income $28 $27 $32 $4 $34
EBT (Earn Before Taxes) $256 $253 $308 $295 $472
Taxes (neg) -$94 -$79 -$95 -$50 -$82
NI from Recurring Op $162 $174 $213 $245 $390
Extraordinary $122 -$137 -$77 $21 -$273
Net Income $40 $311 $290 $224 $663
Fully Diluted EPS $4.420 $4.770 $5.190 $1.690 $4.170
Dividends per Share $0.820 $0.820 $0.820 $1.280 $1.280
Stock Price (end of yr) $56.850 $52.900 $72.220 $65.230 $75.880
Financial Statement Analysis

Year 2002 2003 2004 2005 2006
Cash & Mkt Sec. $59 $19 $123 $39 $182
Account Receivable $704 $656 $832 $828 $828
Inventory $184 $209 $234 $314 $319
Misc CA $106 $194 $79 $287 $129
Total Current Assets $1,053 $1,078 $1,268 $1,468 $1,458
Net Fixed Assets $1,380 $1,450 $1,445 $2,305 $2,421
Intangibles $1,256 $1,348 $1,471 $7,294 $7,363
Other Non-Current Assets $608 $568 $473 $732 $361
Total Assets $4,297 $4,444 $4,657 $11,799 $11,603
Accounts Payable $334 354 326 371 419

Other CL $813 $779 $850 $1,865 $1,381
Total Current Liabilities $1,147 $1,133 $1,176 $2,236 $1,800
Notes Payable (LT)
LT Debt $2,168 $2,044 $1,843 $4,154 $3,939
Total Debt $3,315 $3,177 $3,019 $6,390 $5,739
Retained Earnings $1,086 $1,231 $1,398 $1,422 $1,673
Common Stock -$104 $36 $240 $3,987 $4,191
Total Liabilities and Equity $4,297 $4,444 $4,657 $11,799 $11,603
Outstanding Shares 36.566 36.596 37.909 80.036 86.656

Year 2002 2003 2004 2005 2006
Net Cash from Op Activities $244 $528 $499 $422 $833
Derpreciation $230 $242 $267 $414 $441
Net Cash from Investing -$1,570 -$214 -$67 -$312 -$294
Net Cash from Financing $1,291 -$357 -$335 -$188 -$401
Net Change in Cash -$35 -$43 $97 -$78 $138

Malt Beverage Industry
Year 2002 2003 2004 2005 2006
Liquidity
Current Ratio (CR) 1.60 1.20 1.50 1.30 1.40
Quick Ratio (QR) 0.70 0.60 0.90 0.60 0.70
Asset Management
Days Sales Outstand DSO 23.00 17.00 21.00 23.00 22.00
Days Carry Inv DCI 32.00 41.00 39.00 42.00 40.00
Days Payable Outstand DPO 28.00 29.00 28.00 29.00 31.00
Fixed Asset Turnover FAT 2.20 3.00 1.60 2.40 2.10
Total Asset Turnover TAT 1.50 1.40 1.10 1.50 1.40
Leverage Ratios
LTD / NW (DE) 200.00% 230.00% 180.00% 140.00% 140.00%
TD / TA (DR) 56.40% 63.00% 57.40% 57.50% 66.50%
FA / NW 160.00% 210.00% 180.00% 130.00% 160.00%
Times Int Earned (TIE) 3.300 1.900 2.200 2.900 3.800
Financial Leverage (FLM) 2.29 2.70 2.35 2.35 2.99
Profitability Ratios
Gross Profit (GPM) 38.40% 36.70% 40.30% 37.30% 36.90%
Operating Profit (OPM) 6.20% 4.20% 5.10% 5.60% 7.10%
EBT / TA ("ROA") 5.90% 4.80% 3.10% 5.90% 7.40%
BEP 9.30% 5.88% 5.61% 8.40% 9.94%
EBT / Tang. NW ("ROE") 22.40% 18.10% 8.60% 19.50% 24.20%
EBT / Sales 4.10% 2.60% 3.10% 3.80% 6.00%

Liquidity ratios
Measures the ability of the firm to pay current obligations

Use both if inventory is a large portion of the company’s
current assets
Current Assets
CR 
Current Liabilities
Current Assets  Inventory

QR 
Current Liabilities
Matter of Fact
The importance of inventories:

– From Table 3.5:
Company Current ratio Quick ratio
Dell 1.3 1.2
Home Depot 1.3 0.4
Lowes 1.3 0.2
– All three firms have current ratios of 1.3. However, the quick
ratios for Home Depot and Lowes are dramatically lower than
their current ratios, but for Dell the two ratios are nearly the
same. Why?

Liquidity Ratios
1.800
1.600
1.400
TAP Current ratio

1.200
Industry Current Ratio
TAP Quick Ratio
1.000
Industry Quick Ratio
0.800
0.600
0.400
2002 2003 2004 2005 2006

Asset mgt ratios (Activity)
CGS DCI  Days Carry Inventory  Inventory

IT =
INV Cost of Goods Sold / 365
Average number of days inventory on the shelf
Accounts Receivable
DSO  Days Sales Outstandin g 
Sales / 365
sales Average number of days for customers to pay
A / R turnover = for their accounts
A /R
Accounts Payable
DPO  Days Payables Outs tan ding 
Cost of Goods Sold / 365
Average number of days it takes us to pay our accounts

50.000
45.000
40.000
TAP Days Carry Inventory

35.000
Industry Days Carry Inventory
30.000
25.000
20.000
2002 2003 2004 2005 2006

80.000
70.000
60.000
50.000
TAP Days Sales Outstanding

40.000
Industry Days Sales Outstanding
30.000
20.000
10.000
0.000
2002 2003 2004 2005 2006

Leverage ratios
Degree of indebtedness (how much)

– cannot say whether good or bad
– Mgt chooses a level of debt
– NW = common equity
= Total Assets – Total Liabilities
Ability to pay interest

Financial leverage - use of other peoples
money to make a higher return

leverage ratios
Total Debt
Debt Ratio 
Total Assets
Earnings Before Interest and Taxes

Times Interest Earned 
Interest

90.000%
85.000%
80.000%
75.000%
70.000%
TAP Debt Ratio
65.000%
Industry Debt Ratio
60.000%
55.000%
50.000%
45.000%
40.000%
2002 2003 2004 2005 2006

6.000
5.000
4.000
TAP Times Interest Earned

3.000
Industry Times Interest Earned Ratio
2.000
1.000
0.000
2002 2003 2004 2005 2006

Profitability ratios
Gross Pr ofit
Gross Pr ofit M arg in 
Sales

Operating Profit Margin 
Sales
Earnings Before Taxes

Earnings Before Taxes / Sales 
Sales
Net Income from Recurring Operations

Net Profit Margin 
Sales

45.000%
40.000%
35.000%
30.000%
TAP Gross Profit Margin
25.000%
Industry GPM
TAP Operating Profit MArgin
20.000%
Industry OPM
15.000%
10.000%
5.000%
0.000%
2002 2003 2004 2005 2006

12.000%
10.000%
8.000%
TAP Operating Profit MArgin
Industry OPM
6.000%
TAP EBT / Sales
Industry EBT / Sales
4.000%
2.000%
0.000%
2002 2003 2004 2005 2006

Profitability ratios

Basic Earning Power 
Total Assets
Net Income Available to Shareholde rs

Re turn on Assets 
Total Assets
Net Income Available to Shareholde rs

EPS 
# Outstandin g Shares

25.000%
20.000%
15.000%
TAP Basic Earning Power
Industry Basic Earning Power
10.000%
5.000%
0.000%
2002 2003 2004 2005 2006

Market Based Ratios
Mkt price
Pr ice Earnings 
EPS
CE TA  TL  pfd equity
Book Value per shr.  
# shares # shares
mkt price
mkt to book 
BPS
DuPont System of Analysis
• The DuPont system of analysis is used to dissect the

firm’s financial statements and to assess its financial
condition.
• It merges the income statement and balance sheet into two
summary measures of profitability.
• The Modified DuPont Formula relates the firm’s ROA to
its ROE using the financial leverage multiplier (FLM),
which is the ratio of total assets to common stock equity:
• ROA and ROE as shown in the series of equations on the
following slide.

DuPont System of Analysis
• The DuPont system first brings together the net profit

margin, which measures the firm’s profitability on sales,
with its total asset turnover, which indicates how
efficiently the firm has used its assets to generate sales.
ROA = Net profit margin  Total asset turnover
• Substituting the appropriate formulas into the equation and
simplifying results in the formula given earlier,

How does a firm create returns
for owners?
Receive Buy
payment inventory
$$$$
AND / OR
Sell a Make a Borrow money!!

product product

Company 2002 2003 2004 2005 2006
EBT / Sales 6.780% 6.325% 7.154% 5.358% 8.077%
TAT 0.879 1.111 1.082 2.143 1.985
ROA 5.958% 7.027% 7.739% 11.481% 16.036%
FLM 4.376 3.507 2.843 2.181 1.979
Approx EOE 26.069% 24.647% 22.004% 25.045% 31.730%
Company 2002 2003 2004 2005 2006

EBT / Sales 5.900% 4.800% 3.100% 5.900% 7.400%
TAT 1.500 1.400 1.100 1.500 1.400
ROA 8.850% 6.720% 3.410% 8.850% 10.360%
FLM 2.294 2.703 2.347 2.353 2.985
Approx EOE 20.298% 18.162% 8.005% 20.824% 30.925%

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Chapter 1

Copyright © 2012 Pearson Prentice Hall.

Business Finance is an examination of the

(70 - 100%) = Pass

Grades are based on the total number of

© 2012 Pearson Prentice Hall. All rights reserved. 1-6

• The recent global financial crisis and subsequent

© 2012 Pearson Prentice Hall. All rights reserved. 1-7

© 2012 Pearson Prentice Hall. All rights reserved. 1-8

• Is there a benchmark that serves as an

© 2012 Pearson Prentice Hall. All rights reserved. 1-9

© 2012 Pearson Prentice Hall. All rights reserved. 1-10

© 2012 Pearson Prentice Hall. All rights reserved. 1-12

• Business ethics are the standards of conduct or moral

© 2012 Pearson Prentice Hall. All rights reserved. 1-13

© 2012 Pearson Prentice Hall. All rights reserved. 1-14

© 2012 Pearson Prentice Hall. All rights reserved. 1-16

© 2012 Pearson Prentice Hall. All rights reserved. 1-17

© 2012 Pearson Prentice Hall. All rights reserved. 1-18

© 2012 Pearson Prentice Hall. All rights reserved. 1-19

© 2012 Pearson Prentice Hall. All rights reserved. 1-20

Whenever a manager owns less than 100% of the firm’s

In theory, managers would agree with shareholder wealth

However, managers are also concerned with their personal

This would cause managers to act in ways that might not

© 2012 Pearson Prentice Hall. All rights reserved. 1-21

© 2012 Pearson Prentice Hall. All rights reserved. 1-22

• Option is the right to buy a stock at a certain

You have an option You have an option to buy a

© 2012 Pearson Prentice Hall. All rights reserved. 1-23

© 2012 Pearson Prentice Hall. All rights reserved. 1-24

© 2012 Pearson Prentice Hall. All rights reserved. 1-25

© 2012 Pearson Prentice Hall. All rights reserved. 1-26

• The Glass-Steagall Act was an act of Congress in 1933

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• The money market is created by a financial relationship

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• From a firm’s perspective, the role of capital markets is to be a liquid

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• The Securities Act of 1933 regulates the sale of securities to the

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• Both individuals and businesses must pay taxes on income.

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Taxable income = 78,000

Taxable income = 17,000,000

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Concentrate on control issue

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Represents the assets that management has purchased

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Year 2002 2003 2004 2005 2006

Financial Statement Analysis

Accounts Payable $334 354 326 371 419

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