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An Overview of Financial Management

financial management

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28 views

An Overview of Financial Management

financial management

Uploaded by

RASHMI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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1-1

CHAPTER 1
An Overview of Financial Management
Role of financial management
Career opportunities
Forms of business organization
Goals of the corporation
Issues of the new millenium
Agency relationships
Copyright 2002 by Harcourt, Inc.

All rights reserved.

1-2

What three questions does financial


management seek to answer?
What causes a company to have a particular stock
value?
How can managers make choices that add value to
their companies?
How can managers ensure that their companies dont
run out of cash while executing their plans?

Copyright 2002 by Harcourt, Inc.

All rights reserved.

1-3

Career Opportunities in Finance

Institutions and capital markets


Investments
Financial management

Copyright 2002 by Harcourt, Inc.

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1-4

Alternative Forms of
Business Organization
Sole proprietorship
Partnership
Corporation

Copyright 2002 by Harcourt, Inc.

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1-5

Sole Proprietorship
Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital
Copyright 2002 by Harcourt, Inc.

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1-6

Partnership

A partnership has roughly the same


advantages and disadvantages as a
sole proprietorship.

Copyright 2002 by Harcourt, Inc.

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1-7

Corporation
Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of set-up and report filing
Copyright 2002 by Harcourt, Inc.

All rights reserved.

1-8

Goals of the Corporation


The primary goal is shareholder wealth
maximization, which translates to
maximizing stock price.
Should firms behave ethically? YES!
Do firms have any responsibilities to
society at large? YES! Shareholders
are also members of society.

Copyright 2002 by Harcourt, Inc.

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1-9

Is maximizing stock price good for


society, employees, and customers?
Employment growth is higher in firms
that try to maximize stock price. On
average, employment goes up in:
firms that make managers into
owners (such as LBO firms)
firms that were owned by the
government but that have been sold
to private investors
Copyright 2002 by Harcourt, Inc.

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1 - 10

Consumer welfare is higher in


capitalist free market economies
than in communist or socialist
economies.
Fortune lists the most admired firms.
In addition to high stock returns,
these firms have:
high quality from customers view
employees who like working there
Copyright 2002 by Harcourt, Inc.

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1 - 11

Factors that Affect Stock Price

Amount of cash flows expected by


shareholders
Timing of the cash flow stream
Risk of the cash flows

Copyright 2002 by Harcourt, Inc.

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1 - 12

Three Determinants of Cash Flows


Sales
Current level
Short-term growth rate in sales
Long-term sustainable growth rate in
sales

Operating expenses
Capital expenses
Copyright 2002 by Harcourt, Inc.

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1 - 13

Factors that Affect the Level and


Risk of Cash Flows
Decisions made by financial managers:
Investment decisions (product lines,
production processes, geographic
market, use of technology, marketing
strategy)
Financing decisions (choice of debt
policy and dividend policy)
The external environment
Copyright 2002 by Harcourt, Inc.

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1 - 14

Financial Management
Issues of the New Millenium
Use of computers and electronic
transfers of information
The globalization of business

Copyright 2002 by Harcourt, Inc.

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1 - 15

Agency Relationships
An agency relationship exists
whenever a principal hires an agent
to act on his or her behalf.
Within a corporation, agency
relationships exist between:
Shareholders and managers
Shareholders and creditors
Copyright 2002 by Harcourt, Inc.

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1 - 16

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
Copyright 2002 by Harcourt, Inc.

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1 - 17

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.
Copyright 2002 by Harcourt, Inc.

All rights reserved.

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