Scribd
Upload
51 views

An Overview of Financial Management

Uploaded by

Imran Umar
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
51 views

An Overview of Financial Management

Uploaded by

Imran Umar
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
You are on page 1/ 17

1-1

CHAPTER 1
An Overview of Financial Management
 Role of financial management
 Career opportunities
 Forms of business organization
 Goals of the corporation
 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
don’t 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. All rights reserved.


1-4
Alternative Forms of
Business Organization

 Sole proprietorship
 Partnership
 Corporation

Copyright © 2002 by Harcourt, Inc. All rights reserved.


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. All rights reserved.
1-6

Partnership

 A partnership has roughly the same


advantages and disadvantages as a
sole proprietorship.

Copyright © 2002 by Harcourt, Inc. All rights reserved.


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. All rights reserved.


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. All rights reserved.
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. All rights reserved.


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. All rights reserved.


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. All rights reserved.


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. All rights reserved.


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. All rights reserved.


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. All rights reserved.


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. All rights reserved.
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.

You might also like