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Financial Management Issues of the New Millennium <ul><li>The effect of changing technology </li></ul><ul><li>The globaliz...
“Globalization” - a move to a more connected world. A process of increased trade, foreign direct investment, and communica...
Globalization is not just a phenomenon and not just a  passing trend. It is the international system that  replaced the Co...
The “democratization” of: <ul><li>Technology -computers, telecom, etc </li></ul><ul><li>Finance  - commercial paper, secur...
Problems of the 21st Century <ul><li>September 11 and the War on Terrorism </li></ul><ul><li>Accounting scandals </li></ul...
Role of Finance in a Typical Business Organization Board of Directors President VP: Sales VP: Finance VP: Operations Treas...
Alternative Forms of Business Organization <ul><li>Sole proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Cor...
Sole proprietorships & Partnerships <ul><li>Advantages </li></ul><ul><ul><li>Ease of formation </li></ul></ul><ul><ul><li>...
Corporation <ul><li>Advantages </li></ul><ul><ul><li>Unlimited life </li></ul></ul><ul><ul><li>Easy transfer of ownership ...
Financial Goals of the Corporation <ul><li>The primary financial goal is shareholder wealth maximization, which translates...
Is stock price maximization the same as profit maximization? <ul><li>No, despite a generally high correlation amongst stoc...
Agency relationships <ul><li>An agency relationship exists whenever a principal hires an agent to act on their behalf. </l...
Shareholders versus Managers <ul><li>Managers are naturally inclined to act in their own best interests. </li></ul><ul><li...
Shareholders versus Creditors <ul><li>Shareholders (through managers) could take actions to maximize stock price that are ...
Factors that affect stock price <ul><li>Projected cash flows to shareholders </li></ul><ul><li>Timing of the cash flow str...
Factors that Affect the Level and Riskiness of Cash Flows <ul><li>Decisions made by financial managers: </li></ul><ul><ul>...
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Transcript of "home.millsaps.edu"

  1. 1. Financial Management Issues of the New Millennium <ul><li>The effect of changing technology </li></ul><ul><li>The globalization of business </li></ul>
  2. 2. “Globalization” - a move to a more connected world. A process of increased trade, foreign direct investment, and communication. Increased flows include skills, culture, ideas, and people. “expansion of global linkages, organization of social life on a global scale…consolidation of a world society.”
  3. 3. Globalization is not just a phenomenon and not just a passing trend. It is the international system that replaced the Cold War system. Globalization is the integration of capital, technology, and information across national borders, in a way that is creating a single global market and, to some degree, a global village. Thomas Friedman, LOT
  4. 4. The “democratization” of: <ul><li>Technology -computers, telecom, etc </li></ul><ul><li>Finance - commercial paper, securitization, junk bonds, international finance-Brady bonds-floating exchange rates </li></ul><ul><li>Information - cable/satellite TV, DVD, financial markets </li></ul>
  5. 5. Problems of the 21st Century <ul><li>September 11 and the War on Terrorism </li></ul><ul><li>Accounting scandals </li></ul><ul><li>Investment Banking scandals </li></ul><ul><li>Crisis of confidence in business </li></ul>
  6. 6. Role of Finance in a Typical Business Organization Board of Directors President VP: Sales VP: Finance VP: Operations Treasurer Controller Credit Manager Inventory Manager Capital Budgeting Director Cost Accounting Financial Accounting Tax Department
  7. 7. Alternative Forms of Business Organization <ul><li>Sole proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul>
  8. 8. Sole proprietorships & Partnerships <ul><li>Advantages </li></ul><ul><ul><li>Ease of formation </li></ul></ul><ul><ul><li>Subject to few regulations </li></ul></ul><ul><ul><li>No corporate income taxes </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Difficult to raise capital </li></ul></ul><ul><ul><li>Unlimited liability </li></ul></ul><ul><ul><li>Limited life </li></ul></ul>
  9. 9. Corporation <ul><li>Advantages </li></ul><ul><ul><li>Unlimited life </li></ul></ul><ul><ul><li>Easy transfer of ownership </li></ul></ul><ul><ul><li>Limited liability </li></ul></ul><ul><ul><li>Ease of raising capital </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Double taxation </li></ul></ul><ul><ul><li>Cost of set-up and report filing </li></ul></ul>
  10. 10. Financial Goals of the Corporation <ul><li>The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price. </li></ul><ul><ul><li>Do firms have any responsibilities to society at large? </li></ul></ul><ul><ul><li>Is stock price maximization good or bad for society? </li></ul></ul><ul><ul><li>Should firms behave ethically? </li></ul></ul>
  11. 11. Is stock price maximization the same as profit maximization? <ul><li>No, despite a generally high correlation amongst stock price, EPS, and cash flow. </li></ul><ul><li>Current stock price relies upon current earnings, as well as future earnings and cash flow. </li></ul><ul><li>Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa). </li></ul>
  12. 12. Agency relationships <ul><li>An agency relationship exists whenever a principal hires an agent to act on their behalf. </li></ul><ul><li>Within a corporation, agency relationships exist between: </li></ul><ul><ul><li>Shareholders and managers </li></ul></ul><ul><ul><li>Shareholders and creditors </li></ul></ul>
  13. 13. Shareholders versus Managers <ul><li>Managers are naturally inclined to act in their own best interests. </li></ul><ul><li>But the following factors affect managerial behavior: </li></ul><ul><ul><li>Managerial compensation plans </li></ul></ul><ul><ul><li>Direct intervention by shareholders </li></ul></ul><ul><ul><li>The threat of firing </li></ul></ul><ul><ul><li>The threat of takeover </li></ul></ul>
  14. 14. Shareholders versus Creditors <ul><li>Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors. </li></ul><ul><li>In the long run, such actions will raise the cost of debt and ultimately lower stock price. </li></ul>
  15. 15. Factors that affect stock price <ul><li>Projected cash flows to shareholders </li></ul><ul><li>Timing of the cash flow stream </li></ul><ul><li>Riskiness of the cash flows </li></ul>
  16. 16. Factors that Affect the Level and Riskiness of Cash Flows <ul><li>Decisions made by financial managers: </li></ul><ul><ul><li>Investment decisions </li></ul></ul><ul><ul><li>Financing decisions (the relative use of debt financing) </li></ul></ul><ul><ul><li>Dividend policy decisions </li></ul></ul><ul><li>The external environment </li></ul>
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