Chapter 1 -- The Role of Financial Management · PDF fileVan Horne & Wachowicz, © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Chapter 1: The Role of Financial

Van Horne & Wachowicz,

© 2001 Prentice-Hall, Inc.

Fundamentals of Financial Management, 11/e

Chapter 1: The Role of Financial Management

I - 1by Gregory A. Kuhlemeyer, Ph.D.,

Carroll College, Waukesha, WI

1-1

Type of Business andType of Business and

The Role of Financial The Role of Financial

ManagementManagement

Type of Business andType of Business and

The Role of Financial The Role of Financial

ManagementManagement

1-2

Organizing a BusinessOrganizing a Business

Types of Business Organizations

Sole Proprietorships

Partnerships

Corporations







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Sole

Proprietorship

Partnership Corporation

Who owns the

business?

The manager

Partners Shareholders

Are managers

and owners

separate?

No No Usually

What is the

owner’s

liability?

Unlimited Unlimited Limited

Are the owner

& business

taxed

separately?

No No Yes

Organizing a BusinessOrganizing a Business

1-4

Corporate StructureCorporate Structure

Sole Proprietorships

Corporations

Partnerships

Limited Liability

Corporate tax on profits

+

Personal tax on

dividends

Unlimited Liability

Personal tax on profits







1-5

What is the Goal What is the Goal

of the Firm?of the Firm?

Maximization of Maximization of

Shareholder Wealth!Shareholder Wealth!

Value creation occurs when

we maximize the share price

for current shareholders.

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Financial

Manager

Firm's

operations Investors

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations

(3)

(4a) Cash reinvested

(4a)

(4b) Cash returned to investors

(4b)

The Role of The Financial ManagerThe Role of The Financial Manager

Real

assets







1-7

Investment DecisionsInvestment Decisions

What is the optimal firm size?

What specific assets should be

acquired?

What assets (if any) should be

reduced or eliminated?

Most important of the three Most important of the three

decisions.decisions.

1-8

Financing DecisionsFinancing Decisions

What is the best type of financing?

What is the best financing mix?

What is the best dividend policy?

How will the funds be physically

acquired?

Determine how the assets (LHS of Determine how the assets (LHS of

balance sheet) will be financed (RHS balance sheet) will be financed (RHS

of balance sheet).of balance sheet).







1-9

Asset Management Asset Management

DecisionsDecisions

How do we manage existing assets

efficiently?

Financial Manager has varying degrees

of operating responsibility over assets.

Greater emphasis on current asset

management than fixed asset

management.

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Goals of The CorporationGoals of The Corporation

Shareholders desire wealth maximization

Do managers maximize shareholder

wealth?

Mangers have many constituencies

“stakeholders”

“Agency Problems” represent the conflict

of interest between management and

owners







1-11

Role of ManagementRole of Management

An agentagent is an individual

authorized by another person,

called the principal, to act in

the latter’s behalf.

Management acts as an agentagent

for the owners (shareholders)

of the firm.

1-12

Agency TheoryAgency Theory

Agency TheoryAgency Theory is a branch of

economics relating to the

behavior of principals and their

agents.

Jensen and Meckling developed

a theory of the firm based on

agency theoryagency theory.







1-13

Agency TheoryAgency Theory

Incentives include stock optionsstock options,,

perquisitesperquisites,, and bonusesbonuses.

Principals must provide incentivesincentives

so that management acts in the

principals’ best interests and then

monitormonitor results.

1-14

Company and Financial Company and Financial

EnvironmentEnvironment







1-15Irwin/McGraw-Hill

Financial MarketsFinancial Markets

Company

Issue Debt

CashInvestors



Funds

Funds

Banks

Insurance Cos.

Brokerage Firms

Obligation

s

Depositors

Policyholders

Investors

Obligation

s

Company

Intermediary

Investor









Banks

Depositors

$2.5 mil

Cash

Loan

Deposits

Company

Intermediary

Investor

1-18

Financial Public Relations

and Investor Relations







1-19

WHAT IS PR ?

PR Involves a Variety of Programmes

Designed to Promote or Protect a

Company,s Image or its Products

1-20

Evaluate public Attitudes

Identifies issues of Identifies issues of public concern

programs to gain public acceptance

Executes programs to gain public acceptance

The Role of The Role of

Public RelationsPublic Relations







1-21

Functions of Public RelationsFunctions of Public Relations

Press Relations Press Relations

Product PublicityProduct PublicityProduct PublicityProduct Publicity

Corporate CommunicationCorporate CommunicationCorporate CommunicationCorporate Communication

Public AffairsPublic AffairsPublic AffairsPublic Affairs

LobbyingLobbyingLobbyingLobbying

Employee and Investor RelationsEmployee and Investor RelationsEmployee and Investor RelationsEmployee and Investor Relations

Crisis ManagementCrisis ManagementCrisis ManagementCrisis Management

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Documents

Chapter 1 -- The Role of Financial Management · PDF fileVan Horne & Wachowicz, © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Chapter 1: The Role of Financial