THE ROLE OF MANAGERIAL
FINANCE
FINANCE AND THE FIRM
Finance: science and art of how individuals and firms raise, allocate, and invest money
- Science: financial theories and concepts to establish general rules
- Art: adapting theory to particular situations
Managerial Finance: concerned with responsibilities of a financial manager working in a
business
Firm: intermediaries that bring investors and investment opportunities together; goals:
- Maximize shareholder wealth: maximizing the stock price
- Maximize profit:
- Earnings per Share (EPS): way to measure profit: amount earned during
the period on behalf of each outstanding share of stock; total earnings
available for the firm’s stockholders / number of shares of stock outstanding
- Profit maximization ≠ highest possible share price:
- Timing: receipt of funds sooner rather than later is preferred
- Cash flows: profits do not necessarily result in cash flows available to
stockholders
- Risk: stockholders are risk averse (in order to bear risk, compensation
is required); investors demand higher returns on risky investments and
accept lower returns on relatively safe investments…
