Activist investors may pressure management to run a more efficient operation. Banks and other similar financial institutions are among the primary employers in the field of finance. It can apply to personal finance where individuals develop budgets to manage their spending and make investments to meet future goals, such as retirement. While it seems wrong to say that a corporation can spend too much money on trying to improve the welfare of society, keep in mind that the owners of the corporation are the stockholders. Learning Objectives 1. The three key elements (magnitude, timeliness, and riskiness) are not individual goals. Also, the income is only taxed once (as opposed to being taxed at both the business and personal level). The best way to make managers interested in maximizing value is to pay them based on their stock performance. Dividends represent the portion of the profit that is CURRENTLY being paid out while capital gains are dependent on investors’ expectations of FUTURE profits. What do we mean by risk aversion? Cash budget. A corporation is a firm owned by many individuals (stockholders) who in most cases have little input in operating the firm. Chapter 3 Financial Statements, Cash Flow, and Taxes Answers to End-of-Chapter Questions 3-1 The four financial statements contained in most annual reports are the balance sheet, income statement, statement of stockholders’ equity, and statement of cash flows. 180 0 obj <>stream Theoretically, the timeline for this type of security is potentially infinite. Chapter 4 8. Over the following few months the stock price gradually fell, trading significantly below its original offering price of $17 per share (all the way down to about $5 per share in Dec. 2018). This includes areas such as retirement planning, insurance, personal budgeting (e.g. If you are risk averse, should you take the coin flip? Set your financial goals. These careers tend to be very competitive, demanding, and offer the potential for high income. For example, there may be a clause in the debt agreements that all debt becomes due in the event of a takeover. Does adequate seem like a vague word? There are several primary areas of finance. While what has happened in the past is not irrelevant, the relevance is based on how it might impact future cash flows. However, the manager may operate under the goal of maximizing his happiness instead of firm value. Due to the separation between business and the owners, stockholders are typically not liable for anything beyond their initial investment. If a shareholder with a large stake in the firm creates enough pressure on management and the board of directors, changes to the firm’s strategies and/or operations may occur. Because investors are risk-averse (a concept we will introduce shortly), stocks must generate higher expected returns than safer investments (like bonds) in order to attract investor interest. Stockholders hire managers under the goal of maximizing firm value as doing so will maximize the wealth of shareholders. In order to do this, we must start by defining the concept of the corporation (firm). Khursheed Ahmad Bhat, HOD. Corporations allow individuals to own multiple businesses without having expertise in all (or even any) of these businesses. Therefore, something like depreciation may understate the financial cost of owning assets. Explain how career management and education can determine your income level. While there are many similarities between earnings and cash flows, they are not the same. Tìm kiếm fundamentals of personal financial management , fundamentals of personal financial management tại 123doc - Thư viện trực tuyến hàng đầu Việt Nam We should always focus our attention on cash flows instead of earnings. The better we can control these agency problems, the better our chances of maximizing firm value. The goal of the Financial Manager is to Maximize the Shareholder Wealth (side note — sometimes this is referred to as Maximizing Firm Value since increasing the value of the firm increases shareholder wealth.). Given this lower risk, bonds will typically have lower expected returns (note – there can be exceptions where the bond of a firm that is exhibiting financial stress may be riskier and have a higher expected return than the stock of a large, stable company). It can also apply to banking where financial institutions evaluate who to lend money to and how much to charge in interest rates. Finance deals with the allocation of capital in order to optimize the risk-adjusted return earned on that capital. 4. 3. Specifically, the overall mean correlation is 0.13 (indicating a small, positive relationship). Sole proprietorships pay personal income tax not corporate tax. MCS2100 - Personal Financial Management Study Group/Chapter Summaries Personal Financial Planning-Process of managing your money to achieve personal economic satisfaction-Organized and planned process (identify, set priorities to meet needs and goals)-Results in financial and personal satisfaction, control, goal achievement-Six steps 1. Explain what is meant by social responsibility and ethics? If a firm’s assets are worth $60 per share under optimal conditions, but under current management are only valued at $50, management is not maximizing firm value. CHAPTER 5. This topic will be discussed in more detail later, but essentially, it is the idea that the owners of the company are not handling the decision-making. What can be done to help minimize this problem? Specifically, the way many options packages are granted they reward short-term fluctuation in the price of the stock more than long-term value creation. Generally Accepted Accounting Principles (GAAP) or International Accounting Standards (IAS) allow corporations some flexibility in how they account for revenues and expenses. The firm needs to generate positive cash flows in order to maintain its operations. What 3 elements are essential to meeting this goal? Investors base their valuation decisions on the future of the firm. Census for January 2021 shows there were 330 million people in the US and 7.7 billion people on the planet. Snap, Inc. (Snapchat) is an example of a limited liability corporation that recently became a publicly traded corporation via an Initial Public Offering, IPO. Discuss. Sources of Finance. The most common career path associated with personal finance is the financial advisor/planner. Explain the concepts of limited liability and double-taxation and how they relate to the corporate form of ownership. What is personal financial statement? This allows an investor (owner) to reduce her risk and take advantage of opportunities that would not be accessible without corporations. The owner is liable (legally and financially) for the actions and liabilities of the business. Learn financial management chapter 1 personal with free interactive flashcards. However, we must remember that while social responsibility is consistent with our primary goal (maximizing shareholder wealth) it is not the primary goal in and of itself. S&P Indices report, In most years the S&P 500 firms that report a breakdown of foreign revenues report between 40-50% of their revenues from foreign countries. While the concept applies to both personal and business oriented decisions, the focus of this course will be first on corporations and secondarily on personal issues. Stocks are a form of ownership (equity) in a corporation. 3. endstream endobj 181 0 obj <>stream Chapter 2 4. However, risk aversion does not mean investors avoid risk at all costs…only that they need to be paid to take on extra risk. 1 Chapter 1 -- An Overview of Financial Management • What is finance: cash flows between capital markets and firm’s operations • The goal of a firm • Forms of business organization • Intrinsic value and market price of a stock • Agency problem • Business ethics • Career opportunities in finance INTRODUCTION AND STATEMENT OF THE PROBLEM Introduction Financial matters are related to all aspects of personal and family life. Introduction • Till 1900 financial managers are supposed to raise funds, manage firms cash positions, and petty cash expenses. However, it may not be bad enough to justify a takeover. The first student normally gets As in her classes while the second student normally gets Cs. Compensation packages must be carefully designed to align the interest of management with the objective of creating shareholder wealth in order to minimize agency conflicts. However, things are rarely equal. Chapter 1 The Financial Planning Process 2. For example, if the stock price before the takeover is $50, the takeover offer may be $70 per share. They find a consistent pattern that social responsibility is correlated with firm performance. Explain why personal financial planning is so important. These are essential financial instruments that we will discuss in depth throughout the semester. ... E 17 The file management system has the following disadvantages over Database system. Publicly traded corporations must follow SEC guidelines pertaining to registration and reporting (such as audited annual and quarterly reports) that are costly. When you buy a stock, you own it until you decide to sell or the company goes bankrupt. In practice, there are different types of partnerships (general vs. limited vs. limited liability). A sole proprietorship is a business organization where the owner is a single person and is solely responsible for control of the business. �.-s�{NF�KI� Lԝ����m)y�`�m��.0ѡA�a�,x����Ia���r������l�qY�PUWD�;��d���8�����ˣ!����� �.�^��K� ��x8�M��'P�S}̗|smp��c�EM�f_��T��s)�;�2���7vnIs�O��,��"����\������3�ҩ|�Z ���VO�Wy\����f��m�l/��y�|�a��y�Ɂ�@9_��R�K�֑Ub�O�G�? After considering this would you be in favor of regulations? Firms that choose to aggressively apply GAAP/IAS may mislead shareholders by reporting artificially high earnings. |:��W��� ZQ������m�����{������� t������%�/c-��o��+� 4��Oф��c����k It should, because it is intentionally vague. In many cases, the CEO is also the Chairperson of the Board of Directors. Profit maximisation V/S wealth maximisation objectives. �"�9 ru4�EG�Kގ��@W �Es'��h�e�>S���(�R>��ϰ�d�j���n���,�0��!��������F0sg�������� �ED��J!,%Ź�h�G�-��3�������,:�b(�9�KM�,A��##WW��5����@�D&�_�נ�$���. Types of personal financial statement: Balance sheet (also known as net worth statement and statement of financial planning). As an owner, you are entitled to a piece of the company’s profits (on a pro-rated basis equivalent to the percentage of ownership). Large corporations have several million (or in some cases billion) shares outstanding, so when an individual owns 100 shares they own a very small fraction of the firm. A fundamental component of the corporate form of ownership is the separation of ownership from the process of managing the firm. 1993). Determine current financial situation 2. Base your arguments on the concept of shareholders and wealth maximization. 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