Handbook of Finance: Investment Management and Financial Management

Chapter 55. Introduction to Financial Management and Analysis

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

PAMELA P. DRAKE, PhD, CFA

J. Gray Ferguson Professor of Finance and Department Head of Finance and Business Law, James Madison University

Abstract: The decision making of financial managers involves investment decisions and financing decisions. Financial managers assess the potential risks and rewards associated with investment and financing decisions through the application of financial analysis. The form of the business enterprise—whether a sole proprietorship, partnership, corporation, or some other form—affects the life of the enterprise, the liability of its owners, the taxation of income, and access to funds. In turn, the form of business influences financial decision-making through its effect on taxes, governance, and the liability of owners. The objective of financial decision-making in a business is the maximization of the wealth of owners. Because managers' self-interest may not be consistent with owners' best interests, owners must devise ways to align managers' and owners' interests. Recent scandals have enhanced the awareness of the responsibility of CEOs, CFOs, and board members to the stakeholders of a business enterprise.

Keywords: financial analysis, sole proprietorship, partnership, corporation, market value of shareholders' equity, economic profit, cost of capital, accounting profit, principal-agency relationship, ...