- 1. Chapter 1
- The Roles and Objectives of Financial Management
2. Introduction
- This chapter introduces the financial management process of the
typical firm. It looks at the financial manager, the field of
finance, financial decisions and their implications, and the daily
questions faced by the firms financial management.
3. A GENERAL LOOK ATFINANCE
- Finance is the art and science of managing money
4.
- How is finance related to other fields of study?
- What are the goals and objectives of financial managers?
- How has the finance field evolved?
- How is the finance field changing today?
Questions Faced in Finance 5. THERE ARE THREE MAJOR AREAS OF
FINANCE
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- Investments -- Concerned with analyzing potential investments
(including Real Estate) in order to achieve a certain rate of
return consistent with a desired level of risk. Return on
Investment
-
- Financial institutions and markets -- Concerned with the
management of financial institutions like commercial banks,
insurance companies, etc.Also concerned with analyzing financial
markets and predicting interest rates.
6. AREAS OF FINANCE --continued
-
- Business finance or corporate finance or managerial finance
which is concerned with the management of the non-financial
corporation.Primarily concerned with the for profit organization,
but same principles apply to the not for profit organization.
- This course is concerned with managerial finance, but we will
get into the other areas. That is, at times, we will assume the
role of a banker or investor .
7. What Activities are Involved in Managerial Finance
- Investmentof funds or capital budgeting
- Working capital management
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- Amount of credit to grant
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- Amount of inventory to hold
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- Where to obtain short term capital
- Acquisition of funds -Financing
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- Long term debt versus short term debt
8. Activities in Finance -continued
- Distributionor Dividend Decision
9. In Making Financial Management Decisions, What is Our
Goal?
10. Owners Wealth Maximization (OWM) or Stockholders Wealth
Maximization (SWM) Objective of thefinancial manager NOT profit
maximization Does not consider time value of money or cash flows or
risk Objective of Financial Management ( FM ) 11. Principal Forms
of Business Organizations are:
12. Sole Proprietorship
- Unlimited liabilitydisadvantage
- Difficulty raising funds disadvantage
- Represent 75 percent of all businesses
- Account for less than 6% of the dollar volume
- Check out small business info from the SBA
13. Partnership
- Owned by two or more persons
- Classified as general or limited
- Partnership dissolves when a general partner dies
- General partner has unlimited liability
- Limited partners liability limited by partnership
agreement
14. Corporation
- Have a board of directors
- Easy marketability ofshares of ownership
Dartmouth College Case 15. Optimal Form of Organization
Influenced by
16. Board of Directors
- Stockholders elect a board of directors
- Board of directors then elect the officers
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- Chief executive officer (CEO)
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- Chief operating officer (COO)
-
- Chief financial officer (CFO)
Management 17. Major Advantage of Corporation is Limited
Liability
- We will assume in this course that we are working with
corporations
- Ownership is represented by common stock (CS)
- Our objective is to maximize thelong termvalue of the common
stock (this is the same as OWM or SWM)
18. Three Basic Factors DetermineC/SMarket Value
Expected cash flows Also, interest rates and tenor of the market
19. Risk-Return Tradeoff
- We will assume that firms and investors are risk averse
- There is no such thing as a free lunch
- Do you want to sleep well or eat well?
20. SWM
- Considers the timing and risk of the benefits from stock
ownership
- Determines that a good decision increases the price of the
firm's common stock( c/s )
- Is an impersonal objective
- Is concerned for social responsibility and ethics
21. Social Responsibility
- Ethical issues will constantly confront financial managers as
they achieve the goal of the firm ( SWM ).
- (essentially, treat others as you would have
Managers Must 22. Conditions Affecting Market Value
- Economic environment factors
- Managerial Decisions -- Which will determine
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- Risk of expected cash flows
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- Timing of expected cash flows
- Conditions in financial markets
23. Stockholders elect a board of directors Board of directors
then hire management ( officers ) 24. Who Manages?
- Board of directors deals with broad policy
- 3 to 5 year strategic plan
- Management makes most of the decisions
- Day-to-day decisions following the strategic plan
25. Stockholder Rights
26. Priority of Corporate Securities
- Common stock(C/S) (lowest)
- Major corporate Web sites
- http://www. bankofamerica .com/
- http://www. wachovia .com
27.
- Problem createdby separation of
- their own welfare instead
Owners (shareholders) ManagementandEmployees Job Security One
Agency Relationships / Problems 28. Job Security
- Management decisions based on retaining management rather than
SWM
- ExampleA decision toretain suppliers rather than selecting new
suppliers providing higher quality or lower cost
- WhyIf the transition is mishandled management will be
scrutinized but if no change is made the issue will be ignored
29. Agency Costs
- A. Management incentives (e.g. stock options)
- B. Monitor performance (e.g. auditing)
- C. Owners protection(e.g. bonding)
- D. Complex Organizational Structures
Pervasive Trends Flatten organization structures to cut costs
Incorporate Technology in Managing Eliminate Back Office Operations
30.
- Agency Problem created byseparation of
Management A second and similar Agency problem Owners Creditors
Protective covenants in loan agreements 31. Agency Problem between
Stockholders and Creditors
- Creditors return is limited (fixed) by interest rate on
debt
- Stockholders have limited liability and potential for unlimited
returns.They are willing and rewarded for taking risks.
32. Examples of Protective Covenants
33. Competitive Factors Influencing C/S Market Value
- Bargaining power of buyers
- Bargaining power of suppliers
- Rivalry among current competitors
34. Cash Flow Concept Used for
External sourcesCash Internal sources CF does not equal
accounting profit 35. Shareholder Wealth Maximizing Is a Market
Concept and Results in
- Measured by Market Value of C/S
36. NPV of an Investment
- NPV=PV of future cash inflows minusPV of cash outflows
- The NPV of an investment represents the contributions of that
investment to the value of the firm and affects the Stockholders
Wealth Maximization (SWM)
37. Small Business Vs. Large Corporations Fundamental concepts
are the same 38. Small Business
- 1) Not the dominant firm in the industry
- 2) Tend to grow more rapidly
- 3) Limited access to financial markets
- 4) Lack management resources
- 5) Have a high failure rate
- 6) Stock is not publicly traded
- 8) Owner/manager frequently the same
39. Treasurers Activities
- Management of cash and marketable securities
40. Controllers Activities
41.
Disciplines Impacting Finance Finance 42. Professional
Organizations
- Financial Executives International
- Institute of Chartered Financial Analysts
- Financial Management Association
- Credit Management Association
- Institute of Certified Financial Planners
- Institute of Management Accountants
43. Exciting Career Opportunities in Finance
- Vice President of Finance (CFO)
- Director, Investor Relations
- Account Executive, Security Broker
Check out http://www. careerpath .com/