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McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

The Goals and Functions of Financial Management
1

Chapter Outline
Introduction to Finance
Risk-Return Tradeoff
Forms of Organizations
Corporate Governance
Goals of Financial Management
Social Responsibility and Finance
Role of Financial Markets

Financial Management
Financial Management or business finance is concerned with managing an entity’s money.
For example, a company must decide:
where to invest its money.
whether or not to replace an old asset.
when to issue new stocks and bonds.
whether or not to pay dividends.

Relationship between Finance, Economics and Accounting
Economics provides structure for decision making in many important areas.

Provides a broad picture of economic environment.
Accounting provides financial data in various forms.
Income statements, balance sheets, and statement of cashflows.
Finance links economic theory with the numbers of accounting.

Evolution in the Field of Finance
At the turn of the century: Emerged as a field separate from economics.
By 1930s: Financial practices revolved around such topics as:
Preservation of capital.
Maintenance of liquidity.
Reorganization of financially troubled corporation.
Bankruptcy.

Evolution in the Field of Finance (cont’d)
By mid-1950s: Finance becomes more analytical.
Financial Capital (accounting capital/ money) was used to purchase Real Capital (economic capital/ long-term plant and equipment).
Cash and inventory management
Capital structure theory
Dividend policy

Recent Issues in Finance
Recent focus has been on:
Risk-return relationships.
Maximization of returns for a given level of risk.
Portfolio management.
Capital structure theory.
New financial products with a focus on hedging are being widely used.

Recent Issues in Finance (cont’d)
The following are significant to financial managers …

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