Financial Management

Key players in financial market: 1)Investors:individuals save and invest to smooth consumption across time(save for retirement, borrow to buy a house) or smooth consumption across risk-outcomes(save for a “rainy day” insurance)// 2)Corporations: raise $ by selling securities(bond, stock), invest in pj(build a factory), and pay investors cash-flows (dividends, interest) A)Capital budgeting decision: what investment opportunity should I choose?How do I compare different opportunities? B)Capital Structure Decision:How much should the firm borrow?Should I get a bank loan or debt?How about issuing more stocks? C)Working Capital management:How much cash and inventory should we keep on hand?Should we sell on credit to customers? 3)Financial institutions and markets: “match” saving/borrowing needs of individuals with the investing/cash-flow needs of corporations(eg. Stock exchange[HKEx,NYSE], Commercial bank [HSBC], Investment bank[Goldman sachs]) A)By owner of assets: (i)Primary market:original sale of securities by governments or corporations(Public offering:sell securities to general public,require registration with regulator and disclosure of great deal of info/Private placement: negotiated sale to a few buyers,X require registrationless costly) (ii)Secondary market:transaction btw investors after original sale B)By type of sales: (i)Dealer market: market participants do not buy from or sell to one another directly but through a dealerdealers buy or sell out of their inventory (ii)Auction market:individuals buy and sell btw one another and auctions take place//Forms of business organization:

Sole proprietorship

Partnership

Corporations

Owner

Manager

Partners

Shareholders

Separate owner, manager

No

(General partners: run business/Limited: X active)

Usually(elected by board of director)

Owner’s liability

Unlimited

Limited

Separate owner and business tax

No (as personal income)

Yes(Corporate+owner tax)

Raise equity capital

Limited

Unlimited(sell new share)

Transfer ownership

Difficult

Easy

Goal of financial management: Equity maximizationwealth comes from company’s future cash flow(equity