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An Overview of Financial Management

This document provides an overview of key concepts in corporate finance including career opportunities in finance, the goals and responsibilities of financial managers, forms of business organization, and agency relationships. Specifically, it discusses maximizing shareholder wealth through stock price, evaluating tradeoffs between profit and stock price, and how financial management decisions impact cash flows, valuation, and firm value.

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Cindy Apriza
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33 views

An Overview of Financial Management

This document provides an overview of key concepts in corporate finance including career opportunities in finance, the goals and responsibilities of financial managers, forms of business organization, and agency relationships. Specifically, it discusses maximizing shareholder wealth through stock price, evaluating tradeoffs between profit and stock price, and how financial management decisions impact cash flows, valuation, and firm value.

Uploaded by

Cindy Apriza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 17

CHAPTER 1

An Overview of Financial
Management
■Career Opportunities
■Issues of the New Millennium

■Forms of Businesses

■Goals of the Corporation

■Agency Relationships

1-1
Career Opportunities in
Finance
■ Money and capital markets
■ Investments
■ Financial management

1-2
Responsibility of the Financial
Staff
■ Maximize stock value by:
■ Forecasting and planning
■ Investment and financing decisions
■ Coordination and control
■ Transactions in the financial markets
■ Managing risk

1-3
Role of Finance in a Typical
Business Organization
Board of Directors

President

VP: Sales VP: Finance VP: Operations

Treasurer Controller

Credit Manager Cost Accounting

Inventory Manager Financial Accounting

Capital Budgeting Director Tax Department

1-4
Financial Management Issues
of the New Millennium
■ The effect of
changing
technology
■ The globalization
of business

1-5
Percentage of Revenue and Net Income
from Overseas Operations for 10
Well-Known Corporations, 2001
Company % of Revenue % of Net Income
from overseas from overseas
Coca-Cola 60.8 35.9
Exxon Mobil 69.4 60.2
General Electric 32.6 25.2
General Motors 26.1 60.6
IBM 57.9 48.4
JP Morgan Chase & Co. 35.5 51.7
McDonald’s 63.1 61.7
Merck 18.3 58.1
3M 52.9 47.0
Sears, Roebuck 10.5 7.8
1-6
Alternative Forms of Business
Organization
■ Sole proprietorship
■ Partnership
■ Corporation

1-7
Sole proprietorships &
Partnerships
■ Advantages
■ Ease of formation
■ Subject to few regulations
■ No corporate income taxes
■ Disadvantages
■ Difficult to raise capital
■ Unlimited liability
■ Limited life

1-8
Corporation
■ Advantages
■ Unlimited life
■ Easy transfer of ownership
■ Limited liability
■ Ease of raising capital
■ Disadvantages
■ Double taxation
■ Cost of set-up and report filing

1-9
Financial Goals of the Corporation
■ The primary financial goal is
shareholder wealth maximization,
which translates to maximizing stock
price.
■ Do firms have any responsibilities to
society at large?
■ Is stock price maximization good or bad
for society?
■ Should firms behave ethically?

1-10
Is stock price maximization the
same as profit maximization?
■ No, despite a generally high correlation
amongst stock price, EPS, and cash flow.
■ Current stock price relies upon current
earnings, as well as future earnings and
cash flow.
■ Some actions may cause an increase in
earnings, yet cause the stock price to
decrease (and vice versa).

1-11
Agency relationships
■ An agency relationship exists whenever
a principal hires an agent to act on their
behalf.
■ Within a corporation, agency
relationships exist between:
■ Shareholders and managers
■ Shareholders and creditors

1-12
Shareholders versus Managers
■ Managers are naturally inclined to act in
their own best interests.
■ But the following factors affect
managerial behavior:
■ Managerial compensation plans
■ Direct intervention by shareholders
■ The threat of firing
■ The threat of takeover

1-13
Shareholders versus Creditors
■ Shareholders (through managers) could
take actions to maximize stock price
that are detrimental to creditors.
■ In the long run, such actions will raise
the cost of debt and ultimately lower
stock price.

1-14
Factors that affect stock price
■ Projected cash flows
to shareholders
■ Timing of the cash
flow stream
■ Riskiness of the cash
flows

1-15
Basic Valuation Model

■ To estimate an asset’s value, one estimates the


cash flow for each period t (CFt), the life of the
asset (n), and the appropriate discount rate (k)
■ Throughout the course, we discuss how to
estimate the inputs and how financial management
is used to improve them and thus maximize a
firm’s value.
1-16
Factors that Affect the Level
and Riskiness of Cash Flows
■ Decisions made by financial managers:
■ Investment decisions
■ Financing decisions (the relative use of
debt financing)
■ Dividend policy decisions
■ The external environment

1-17

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