Finance 571 Week 1: Introduction to Financial Management

Week 1 of Finance 571 typically focuses on establishing the foundational principles of financial management and its role within a corporation. The primary objective is to understand the fundamental concepts, goals, and responsibilities of financial managers in maximizing shareholder wealth.

The course begins by defining financial management as the art and science of managing a firm’s money to achieve its goals. We explore the key decisions financial managers make: investment decisions (capital budgeting), financing decisions (capital structure), and working capital management decisions. Understanding how these decisions interrelate is crucial. Investment decisions determine which long-term assets the firm should acquire, based on their potential profitability and risk. Financing decisions focus on how the firm should raise the capital necessary to fund these investments, considering the optimal mix of debt and equity. Working capital management deals with the short-term assets and liabilities, ensuring the firm has enough liquidity to meet its day-to-day obligations.

A core theme introduced is the goal of financial management: maximizing shareholder wealth. This does not necessarily mean maximizing profits in the short term, but rather making decisions that increase the long-term value of the firm’s stock. This involves considering the time value of money, risk, and return. The course likely explores potential conflicts of interest, such as the agency problem, which arises when managers, acting as agents for the shareholders, may make decisions that benefit themselves at the expense of the owners. Mechanisms to mitigate these problems, like corporate governance and executive compensation structures, are often discussed.

The week also likely covers the different forms of business organization – sole proprietorships, partnerships, and corporations – highlighting the advantages and disadvantages of each. The corporate form’s ability to raise capital through the sale of stock is a major focus, as is its limited liability feature. Understanding the legal and regulatory environment within which businesses operate is also generally introduced. This often includes a brief overview of the key financial markets where companies raise capital (e.g., stock markets, bond markets) and the role of financial institutions.

Ethical considerations in financial management are typically addressed in week 1. Students are encouraged to think critically about the social responsibility of corporations and the potential impact of financial decisions on various stakeholders (employees, customers, communities, etc.). Discussions may revolve around topics like insider trading, fraud, and the importance of transparency and accountability in financial reporting.

Finally, week 1 often includes an introduction to the time value of money, a foundational concept in finance. This involves understanding how money grows over time due to interest and the relationship between present value and future value. Basic calculations involving simple and compound interest are usually introduced as a prelude to more complex valuation techniques covered in subsequent weeks.