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Introduction to Financial Management

Introduction to Financial Management

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Welcome to the study of corporate finance: a field with unmatched career opportunities that are as intellectually challenging as they are financially rewarding. In this book, we explain how financial managers apply a few key principles to make important business decisions. Our goals in introducing you to these principles are not only to impart useful knowledge, but also to convey our enthusiasm for our chosen field, as well as help you explore whether a career in corporate finance is right for you.
Chapter 1 describes the roles that corporate finance experts play in a variety of businesses and industries. Most of what corporate finance professionals do on a day-to-day basis falls within one of the five basic functions described in the chapter. We recommend that readers revisit the list of five key functions as they work through this book. Most of the chapters place a heavy emphasis on just one or two of these functions, and it is a useful exercise to map the key concepts from each chapter back to the five functions outlined in Chapter 1.
It has been said that accounting is the language of business, and certainly it is true that financial managers need to master accounting concepts and principles to do their jobs well.
Chapter 2 offers a broad overview of the most important sources of accounting information: firms' financial statements. Our focus in this chapter is not on how accountants construct these statements (we leave that to your accounting professors). Instead, our goal is to illustrate why these statements are important to financial managers and why finance places so much emphasis on cash flow rather than on measures of earnings, such as net income or earnings per share. We also demonstrate how companies can use the information from financial statements to track their performance over time or to benchmark their results against those achieved by other firms.
Chapter 3 introduces one of the most fundamental concepts in finance called the time value of money. Simply put, the time value of money says that a dollar today is worth more than a dollar in the future. The reasoning behind this statement is straightforward. If you have a dollar in hand today, you can invest it and earn interest, so receiving the dollar now is better than having to wait for it. Because most business decisions involve costs and benefits that are spread out over many months or years, managers need a way to evaluate cash flows that the firm pays or receives at different times. Do the costs of this investment outweigh its benefits, or are the benefits high enough to justify the costs? Chapter 3 explains how managers can make valid cost/benefit comparisons when cash flows occur at different times and usina different rates of interest.
2-nd edition.