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1、Instructors ManualChapter 3Page 32CHAPTER 1WHAT IS FINANCE?Objectives Define finance. Explain why finance is worth studying. Introduce the main players in the world of financehouseholds and firmsand the kinds of financial decisions they make.Outline1.1Defining Finance1.2Why Study Finance?1.3Financia
2、l Decisions of Households1.4Financial Decisions of Firms1.5Forms of Business Organization1.6Separation of Ownership and Management1.7The Goal of Management1.8Market Discipline: Takeovers1.9The Role of the Finance Specialist in a CorporationSummaryFinance is the study of how to allocate scarce resour
3、ces over time. The two features that distinguish finance are that the costs and benefits of financial decisions are spread out over time and are usually not known with certainty in advance by either the decision-maker or anybody else.A basic tenet of finance is that the ultimate function of the syst
4、em is to satisfy peoples consumption preferences. Economic organizations such as firms and governments exist in order to facilitate the achievement of that ultimate function. Many financial decisions can be made strictly on the basis of improving the tradeoffs available to people without knowledge o
5、f their consumption preferences.There are at least five good reasons to study finance: To manage your personal resources. To deal with the world of business. To pursue interesting and rewarding career opportunities. To make informed public choices as a citizen. To expand your mind.The players in fin
6、ance theory are households and business firms. Households occupy a special place in the theory because the ultimate function of the system is to satisfy the preferences of people, and the theory treats those preferences as given. Finance theory explains household behavior as an attempt to satisfy th
7、ose preferences. The behavior of firms is viewed from the perspective of how it affects the welfare of households.Households face four basic types of financial decisions: Saving decisions: How much of their current income should they save for the future? Investment decisions: How should they invest
8、the money they have saved? Financing decisions: When and how should they use other peoples money to satisfy their wants and needs? Risk management decisions: How and on what terms should they seek to reduce the economic uncertainties they face or to take calculated risks?There are three main areas o
9、f financial decision-making in a business: capital budgeting, capital structure, and working capital management. There are five reasons for separating the management from the ownership of a business enterprise: Professional managers may be found who have a superior ability to run the business. To ac
10、hieve the efficient scale of a business the resources of many households may have to be pooled. In an uncertain economic environment, owners will want to diversify their risks across many firms. Such efficient diversification is difficult to achieve without separation of ownership and management. Sa
11、vings in the costs of gathering information. The “learning curve” or “going concern” effect. When the owner is also the manager, the new owner has to learn the business from the old owner in order to manage it efficiently. If the owner is not the manager, then when the business is sold, the manager
12、continues in place and works for the new owner.The corporate form is especially well suited to the separation of ownership and management of firms because it allows relatively frequent changes in owners by share transfer without affecting the operations of the firm. The primary goal of corporate man
13、agement is to maximize shareholder wealth. It leads managers to make the same investment decisions that each of the individual owners would have made had they made the decisions themselves. A competitive stock market imposes a strong discipline on managers to take actions to maximize the market valu
14、e of the firms shares. Solutions to Problems at End of Chapter1.What are your main goals in life? How does finance play a part in achieving those goals? What are the major trade-offs you face?SAMPLE ANSWER: Finish school Get good paying job which I like Get married and have children Own my own home
15、Provide for family Pay for childrens education RetireHow Finance Plays a Role: SAMPLE ANSWER: Finance helps me pay for undergraduate and graduate education and helps me decide whether spending the money on graduate education will be a good investment decision or not. Higher education should enhance
16、my earning power and ability to obtain a job I like. Once I am married and have children I will have additional financial responsibilities (dependents) and I will have to learn how to allocate resources among individuals in the household and learn how to set aside enough money to pay for emergencies, education,
