Principles of Managerial Finance

CHAPTER 1 The Role and Environment of Managerial Finance 13

earnings per share (EPS)
The amount earned during the
period on behalf of each
outstanding share of common
stock, calculated by dividing the
period’s total earnings available
for the firm’s common stockhold-
ers by the number of shares of
common stock outstanding.

FIGURE 1.

Financial Activities
Primary activities of the
financial manager

Fixed

Assets

Long-Term

Funds

Current

Making Assets

Investment

Decisions

Making

Financing

Decisions

Current

Liabilities

Balance Sheet

LG

assets held by the firm. Financing decisions determine both the mix and the type

of financing used by the firm. These sorts of decisions can be conveniently viewed

in terms of the firm’s balance sheet, as shown in Figure 1.2. However, the deci-

sions are actually made on the basis of their cash flow effects on the overall value

of the firm.

Review Questions

1–7 What financial activities is the treasurer, or financial manager, responsible

for handling in the mature firm?

1–8 What is the primary economic principle used in managerial finance?

1–9 What are the major differences between accounting and finance with

respect to emphasis on cash flows and decision making?

1–10 What are the two primary activities of the financial manager that are

related to the firm’s balance sheet?

1.3 Goal of the Firm

As noted earlier, the owners of a corporation are normally distinct from its man-

agers. Actions of the financial manager should be taken to achieve the objectives

of the firm’s owners, its stockholders. In most cases, if financial managers are

successful in this endeavor, they will also achieve their own financial and profes-

sional objectives. Thus financial managers need to know what the objectives of

the firm’s owners are.

Maximize Profit?

Some people believe that the firm’s objective is always to maximize profit. To

achieve this goal, the financial manager would take only those actions that were

expected to make a major contribution to the firm’s overall profits. For each

alternative being considered, the financial manager would select the one that is

expected to result in the highest monetary return.

Corporations commonly measure profits in terms of earnings per share

(EPS),which represent the amount earned during the period on behalf of each

outstanding share of common stock. EPS are calculated by dividing the period’s

total earnings available for the firm’s common stockholders by the number of

shares of common stock outstanding.