Your SlideShare is downloading. ×
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

1

250

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
250
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
2
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Contemporary Financial Management 8th Edition by Moyer, McGuigan, and Kretlow Prepared by Tom Peacock University of Houston © 2001 South-Western College Publishing
  • 2. Chapter 1 The Role and Objective of Financial Management
  • 3. <ul><li>How is finance related to other fields of study? </li></ul><ul><li>What are the goals and objectives of financial managers? </li></ul><ul><li>How has the finance field evolved? </li></ul><ul><li>How is the finance field changing today? </li></ul>Questions Faced in Finance
  • 4. Principal Forms of Business Organizations <ul><li>Sole proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul>
  • 5. Sole Proprietorship <ul><li>Owned by one person </li></ul><ul><li>Easy formation advantage </li></ul><ul><li>Unlimited liability disadvantage </li></ul><ul><li>Difficulty raising funds disadvantage </li></ul><ul><li>Represent 75% of all businesses </li></ul><ul><li>Account for < 6% of the $ volume </li></ul>
  • 6. Partnership <ul><li>Owned by two or more persons </li></ul><ul><li>Classified as general or limited </li></ul><ul><li>Partnership dissolves when a general partner dies </li></ul>
  • 7. Liability of Partners <ul><li>General Partner </li></ul><ul><ul><li>Has unlimited liability for all obligations of the business </li></ul></ul><ul><li>Limited Partner </li></ul><ul><ul><li>Liability limited to the partnership agreement </li></ul></ul>
  • 8. Corporation <ul><li>Limited liability </li></ul><ul><li>Permanency </li></ul><ul><li>Flexibility </li></ul><ul><li>Ability to raise of capital </li></ul><ul><li>Legal entity </li></ul><ul><li>Have a board of directors </li></ul><ul><li>Owners are stockholders </li></ul><ul><li>Easy marketability of shares of ownership </li></ul>
  • 9. Stockholders elect a board of directors Board of directors then hire management ( officers )
  • 10. Who Manages ? <ul><li>Board of directors deals with broad policy </li></ul><ul><li>Management makes most of the decisions </li></ul>
  • 11. Stockholder Rights Corporate Securities in Order or Priority Bonds ( highest) Preferred stock Common stock ( C/S ) ( lowest ) Dividend Asset Voting Preemptive
  • 12. Optimal Form of Organization Influenced by <ul><li>Cost </li></ul><ul><li>Complexity </li></ul><ul><li>Liability </li></ul><ul><li>Continuity </li></ul><ul><li>Raising capital </li></ul><ul><li>Decision making </li></ul><ul><li>Tax considerations </li></ul>
  • 13. Shareholder Wealth Maximization (SWM) Objective of the financial manager NOT profit maximization Does not consider time value of money Objective of Financial Management ( FM )
  • 14. SWM <ul><li>Considers the timing and risk of the benefits from stock ownership </li></ul><ul><li>Determines that a good decision increases the price of the firm's common stock (c/s) </li></ul><ul><li>Is an impersonal objective </li></ul><ul><li>Is concerned for social responsibility </li></ul>
  • 15. Social Responsibility <ul><li>Ethical issues will constantly confront financial managers as they achieve the goal of the firm ( SWM ). </li></ul><ul><li>Avoid personal conflicts </li></ul><ul><li>Maintain confidentiality </li></ul><ul><li>Be objective </li></ul><ul><li>Act fairly </li></ul>Managers Must
  • 16. Agency Relationships / Problems Job security <ul><li>Management may maximize </li></ul><ul><li>its own welfare instead </li></ul><ul><li>of the owners wealth </li></ul>Owners (shareholders) Management and Employees <ul><li>Problem created by separation of </li></ul>
  • 17. Job Security <ul><li>Management decisions based on retaining management rather than SWM </li></ul><ul><li>Example – A decision to retain suppliers rather than selecting new suppliers providing higher quality or lower cost </li></ul><ul><li>Why – If the transition is mishandled management will be scrutinized but if no change is made the issue will be ignored </li></ul>
  • 18. Agency Costs <ul><li>Management incentives </li></ul><ul><li>Monitor performance </li></ul><ul><li>Owners protection </li></ul><ul><li>Complex organization structures </li></ul>Recent Trends To flatten organization structures to cut costs
  • 19. <ul><li>Problem created by </li></ul><ul><li>separation of </li></ul><ul><li>Owners </li></ul>Management A similar problem Owners Creditors Protective covenants in loan agreements
  • 20. Examples of Protective Covenants <ul><li>Limitations of Common stock dividends </li></ul><ul><li>Limitations on additional debts </li></ul><ul><li>Not entering into sale and lease back arrangements </li></ul>
  • 21. Shareholder Wealth Maximizing Is a Market Concept and Results in <ul><li>Maximizing PV of E(R) </li></ul><ul><li>Measured by Market Value of C/S </li></ul>
  • 22. 3 Basic Factors Determine C/S Market Value <ul><li>1) Amount of </li></ul><ul><li>2) Timing of </li></ul><ul><li>3) Risk of </li></ul>Expected cash flows
  • 23. Conditions Affecting Market Value <ul><li>Economic environment factors </li></ul><ul><li>Decisions under management control </li></ul><ul><li>Conditions in financial markets </li></ul><ul><li>Expected cash flows </li></ul>
  • 24. Competitive Forces Influencing C/S Market Value <ul><li>New entrants </li></ul><ul><li>Substitute products </li></ul><ul><li>Bargaining power of buyers </li></ul><ul><li>Bargaining power of suppliers </li></ul><ul><li>Rivalry among current competitors </li></ul>
  • 25. Cash Flow Concept Used for <ul><li>Financial analysis </li></ul><ul><li>Planning </li></ul><ul><li>Resource allocation </li></ul>External sources Cash Internal sources CF does not equal accounting profit
  • 26. NPV of an Investment <ul><li>NPV = PV of future cash flows minus cash outlays </li></ul>The NPV of an investment represents the contributions of that investment to the value of the firm and passes on to SWM
  • 27. Different Size Businesses <ul><li>Small Business Vs. Large Corporations </li></ul><ul><li>Fundamental concepts are the same </li></ul>
  • 28. Small Business <ul><li>Not the dominant firm in the industry </li></ul><ul><li>Tend to grow more rapidly </li></ul><ul><li>Limited access to financial market </li></ul><ul><li>Lack management resources </li></ul><ul><li>Have a high failure rate </li></ul><ul><li>Stock is not publicly traded </li></ul><ul><li>Poorly diversified </li></ul><ul><li>Owner/manager frequently the same </li></ul>
  • 29. Controller’s Activities <ul><li>Financial accounting </li></ul><ul><li>Cost accounting </li></ul><ul><li>Taxes </li></ul><ul><li>Data processing </li></ul>
  • 30. Treasurer’s Activities <ul><li>Management of cash and marketable securities </li></ul><ul><li>Capital budgeting </li></ul><ul><li>Financial planning </li></ul><ul><li>Credit analysis </li></ul><ul><li>Investors relations </li></ul><ul><li>Pension fund management </li></ul>
  • 31. <ul><li>Economics </li></ul><ul><li>Accounting </li></ul><ul><li>Marketing </li></ul><ul><li>Production </li></ul><ul><li>Human Resources </li></ul><ul><li>Quantitative Analysis </li></ul>Disciplines used in Finance Finance
  • 32. Professional Organizations <ul><li>Financial Executive Institute </li></ul><ul><li>Institute of Charted Financial Analysis </li></ul><ul><li>Financial Management Association </li></ul><ul><li>Institute of Management Accounting </li></ul>
  • 33. Exciting Career Opportunities in Finance <ul><li>VP of Finance </li></ul><ul><li>Director Investor Relations </li></ul><ul><li>Assistant Treasurer </li></ul><ul><li>Tax Manager </li></ul><ul><li>Financial Analyst </li></ul><ul><li>Account Executive Security Broker </li></ul><ul><li>Mortgage Analyst </li></ul><ul><li>Banking </li></ul>

×