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7/21/2025 1 (M)AEC 127 – Financial Management Introduction to Financial Management Slides content from “Chapter 1: The Role of Managerial Finance” of the book “Principles of Managerial Finance” by Gitman and Zutter Krystianne Paul A. de Pedro Intended Learning Outcomes • At the end of the lesson, the learners can 1. Explain the general concept of finance; 2. Discuss business finance and the role of financial managers; 3. Discuss the different forms of business organizations; 4. Discuss the goal of financial management; and 5. Discuss the Agency problem and control of the corporations. © 2012 Pearson Prentice Hall. All rights reserved. 1-3 What is Finance? • Financial Management: can be defined as the science and art of managing money. – At the personal level, finance is concerned with individuals’ decisions about how much of their earnings they spend, how much they save, and how they invest their savings. – In a business context, finance involves the same types of decisions: how firms raise money from investors, how firms invest money in an attempt to earn a profit, and how they decide whether to reinvest profits in the business or distribute them back to investors. © 2012 Pearson Prentice Hall. All rights reserved. 1-4 What is Finance? • Finance Scope: – Anticipation. – Acquisition – Allocation of Finance or Money • Financial Activities: Balance Sheet Assets Equates Investing Activities Financing Activities Rewarding Activities © 2012 Pearson Prentice Hall. All rights reserved. 1-5 Branches of Finance • Financial Management – Personal Finance – Business Finance – Corporate Finance – International Finance – Investment & Portfolio Management – Financial Statements Analysis. © 2012 Pearson Prentice Hall. All rights reserved. 1-6 Career Opportunities in Finance: Financial Services • Financial Services is the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments. – Career opportunities include banking, personal financial planning, investments, real estate, and insurance.

7/21/2025 3 © 2012 Pearson Prentice Hall. All rights reserved. 1-13 Figure 1.1 Corporate Organization © 2012 Pearson Prentice Hall. All rights reserved. 1-14 Table 1.2 Career Opportunities in Managerial Finance Review Questions • 1–1 What is finance? Explain how this field affects all of the activities in which businesses engage. • 1–2 What is the financial services area of finance? Describe the field of managerial finance. • 1–3 Which legal form of business organization is most common? Which form is dominant in terms of business revenues? • 1–4 Describe the roles and the basic relationships among the major parties in a corporation—stockholders, board of directors, and managers. How are corporate owners rewarded for the risks they take? • 1–5 Briefly name and describe some organizational forms other than corporations that provide owners with limited liability. • 1–6 Why is the study of managerial finance important to your professional life regardless of the specific area of responsibility you may have within the business firm? Why is it important to your personal life? © 2012 Pearson Prentice Hall. All rights reserved. 1-15 © 2012 Pearson Prentice Hall. All rights reserved. 1-16 Goal of the Firm: Maximize Shareholder Wealth •Decision rule for managers: only take actions that are expected to increase the share price. © 2012 Pearson Prentice Hall. All rights reserved. 1-17 Goal of the Firm: Maximize Profit? •Profit maximization may not lead to the highest possible share price for at least three reasons: 1. Timing is important—the receipt of funds sooner rather than later is preferred 2. Profits do not necessarily result in cash flows available to stockholders 3. Profit maximization fails to account for risk Which Investment is Preferred? Risk and Risk behavior • Risk: The chance that actual outcomes may differ from those expected • Risk-averse: Requiring compensation to bear risk. © 2012 Pearson Prentice Hall. All rights reserved. 1-18

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