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An Overview of Financial Management

This document provides an overview of financial management. It discusses career opportunities in finance including money/capital markets and investments. It describes different business organizations like sole proprietorships, partnerships, and corporations. Corporations have advantages like unlimited life but disadvantages like double taxation. The primary goal of corporations is to maximize shareholder wealth through stock price. However, there are debates around societal responsibilities and stakeholder interests. The document also examines agency relationships between shareholders/managers and shareholders/creditors.

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Shane Johns
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45 views14 pages

An Overview of Financial Management

This document provides an overview of financial management. It discusses career opportunities in finance including money/capital markets and investments. It describes different business organizations like sole proprietorships, partnerships, and corporations. Corporations have advantages like unlimited life but disadvantages like double taxation. The primary goal of corporations is to maximize shareholder wealth through stock price. However, there are debates around societal responsibilities and stakeholder interests. The document also examines agency relationships between shareholders/managers and shareholders/creditors.

Uploaded by

Shane Johns
Copyright
© Attribution Non-Commercial (BY-NC)
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
You are on page 1/ 14

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
Alternative Forms of Business
Organization
 Sole proprietorship
 Partnership
 Corporation

1-3
Sole proprietorships &
Partnerships
 Advantages
 Ease of formation
 Subject to few regulations
 No corporate income taxes
 Disadvantages
 Difficult to raise capital
 Unlimited liability
 Limited life
1-4
Corporation
 Advantages
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
 Disadvantages
 Double taxation
 Cost of set-up and report filing
1-5
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

1-6
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?

1-7
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).

1-8
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
1-9
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
1-10
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.

1-11
Factors that affect stock price
 Projected cash flows
to shareholders
 Timing of the cash
flow stream
 Riskiness of the cash
flows

1-12
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

1-13
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
1-14

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