Ppt 14664

617 views
540 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
617
On SlideShare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
12
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • Emphasize that “business finance” is just another name for the “corporate finance” mentioned under the four basic types. Students often get confused by the terminology, especially when different terms are used to refer to the same thing.
  • Video Note: This video looks at the changing role of the Chief Financial Officer (CFO) at the Fortune 500 company, Abbot Laboratories.
  • Provide some examples of capital budgeting decisions, such as what product or service will the firm sell, should we replace old equipment with newer, more advanced equipment, etc.
    Be sure and define debt and equity.
    Provide some examples of working capital management, such as who should we sell to on credit, how much inventory should we carry, when should we pay our suppliers, etc.
  • www: Click on the “web surfer” for more information about sole proprietorships. If you click on the “--Sole Proprietorship” link, you will be taken to an index that will provide a link to information about husband and wife sole proprietorships.
  • www: Click on the “web surfer” for more information about partnerships. If you click on the “—Partnerships” link, you will go to an index that provides links to additional information about limited partnerships, partnership agreements and buy-sell agreements.
    Note that unlimited liability applies to all partners in a general partnership and only the general partners in a limited partnership
    Written agreements are essential due to the unlimited liability.
    Limited partners cannot be involved in the business or else they may be deemed as general partners.
  • www: Click on the “web surfer” to go to a page that discusses corporations. If you click on the “—Corporations” link it will take you back to an index that provides links to additional information on corporations as well as limited liability corporations.
    Discuss how separation of ownership and management can be both an advantage and a disadvantage:
    Advantages
    You can benefit from ownership in several different businesses (diversification)
    You can take advantage of the expertise of others (comparative advantage)
    Easier to transfer ownership
    Disadvantage
    Agency problems if management goals and owner goals are not aligned
    The instructors manual provides additional discussion of limited liability companies and S-corporations
  • Try and have the students discuss each of the goals above and the inherent problems of the first three goals:
    Maximize profit – Are we talking about long-run or short-run profits? Do we mean accounting profits or some measure of cash flow?
    Minimize costs – We can minimize costs today by not purchasing new equipment or delaying maintenance, but this may not be in the best interest of the firm or its owners.
    Maximize market share – This has been a strategy of many of the dot.com companies. They issued stock and then used it primarily for advertising to increase the number of “hits” to their web sites. Even though many of the companies have a huge market share (I.e. Amazon) they still do not have positive earnings and their owners are not happy.
    Maximize the current value of the company’s stock
    There is no short run vs. long run here. The stock price should incorporate expectations about the future of the company and consider the trade-off between short-run profits and long-run profits.
    The purpose of a for-profit business should be to make money for its owners. Maximizing the current stock price increases the wealth of the owners of the firm.
    This is analogous to maximizing owners’ equity for firms that do not have publicly traded stock.
    Non-profits can also follow the same principle, but their “owners” are the constituencies that they were created to help.
    The instructors manual provides a letter to stockholders that was written by former Coca-Cola CEO Roberto Goizueta. There is also a brief discussion of an article that appeared in Fortune magazine that discusses Coke vs. Pepsi and their different philosophies on business in the early 1990’s.
    Ethics Note: See the instructor’s manual for a discussion of Dow-Corning, silicone breast implants and the ethics involved with pursuing owners’ wealth at all costs.
  • Video Note: This video focuses on how one company handled the tough decision to cut jobs and managed to successfully increase shareholder value. It features ABT Co. in Canada.
    A common example of an agency relationship is a real estate broker – in particular if you break it down between a buyers agent and a sellers agent. A classic conflict of interest is when the agent is paid on commission, so they may be less willing to let the buyer know that a lower price might be accepted or they may elect to only show the buyer homes that are listed at the high end of the buyers price range.
    Ethics Note: The instructor’s manual provides a discussion of Gillette and the apparent agency problems that existed prior to the introduction of the sensor razor.
    Direct agency costs – the purchase of something for management that can’t be justified from a risk-return standpoint, monitoring costs.
    Indirect agency costs – management’s tendency to forgo risky or expensive projects that could be justified from a risk-return standpoint.
  • Incentives – discuss how incentives must be carefully structured. For example, tying bonuses to profits might encourage management to pursue short-run profits and forego projects that require a large initial outlay. Stock options may work, but there may be an optimal level of insider ownership. Beyond that level, management may be in too much control and may not act in the best interest of all stockholders. The type of stock can also affect the effectiveness of the incentive.
  • Corporate control – ask the students why the threat of a takeover might make managers work towards the goals of stockholders.
    Other groups also have a financial stake in the firm. They can provide a valuable monitoring tool, but they can also try to force the firm to do things that are not in the owners’ best interest.
  • Ppt 14664

    1. 1. 29/01/15 1 AD 311 Business Finance Fall 2009 Attila Odabaşı Lect 1: Introduction to Corporate Finance (ref. Ch 1)
    2. 2. 29/01/15 2 Main Points Know the basic types of financial management decisions and the role of the financial manager Know the financial implications of the different forms of business organization Know the goal of financial management Understand the conflicts of interest that can arise between owners and managers Understand the various types of financial markets
    3. 3. 29/01/15 3 Corporate Finance Some important questions that are answered using finance What long-term investments should the firm take on? Where will we get the long-term financing to pay for the investment? How will we manage the everyday financial activities of the firm?
    4. 4. 29/01/15 4 Financial Manager Financial managers try to answer some or all of these questions The top financial manager within a firm is usually the Chief Financial Officer (CFO) Treasurer – oversees cash management, credit management, capital expenditures and financial planning Controller – oversees taxes, cost accounting, financial accounting and data processing
    5. 5. 29/01/15 5 Financial Management Decisions Capital budgeting What long-term investments or projects should the business take on? Capital structure How should we pay for our assets? Should we use debt or equity? Working capital management How do we manage the day-to-day finances of the firm?
    6. 6. Forms of Business Organization Three major forms in the United States Sole proprietorship Partnership General Limited Corporation S-Corp Limited liability company29/01/15 6
    7. 7. Sole Proprietorship  A business form for which there is one owner. This single owner has unlimited liability for all debts of the firm.  Oldest form of business organization.  Business incomeBusiness income is accounted for on your personalpersonal income tax formincome tax form. 29/01/15 7
    8. 8. 29/01/15 8 Sole Proprietorship Advantages Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income Disadvantages Limited to life of owner Equity capital limited to owner’s personal wealth Unlimited liability Difficult to sell ownership interest
    9. 9. Partnerships  A business form in which two or more individuals act as owners.  Business incomeBusiness income is accounted for on each partner’s personalpersonal income tax formincome tax form.  General PartnershipGeneral Partnership -- all partners have unlimited liability and are liable for all obligations of the partnership.  Limited PartnershipLimited Partnership -- limited partners have liability limited to their capital contribution (investors only). At least one general partner is required and all general partners have unlimited liability. 29/01/15 9
    10. 10. 29/01/15 10 Partnership Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Disadvantages Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership
    11. 11. Corporations A business form that legally separate from its owners. An artificial entity that can own assets and incur liabilities. Business incomeBusiness income is accounted for on the income tax form of the corporationincome tax form of the corporation.  Separation of ownership and management 29/01/15 11
    12. 12. 29/01/15 12 Corporation Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)
    13. 13. 29/01/15 13 Şirketlerin Sınıflandırılması  Borçlar Yasasına göre düzenlenmiş  Adi şirketler  Türk Ticaret Yasasına göre düzenlenmiş  Şahıs şirketleri Kollektif şirketler Komandit şirketler  Sermaye şirketleri Hisseli Komandit şirketler Anonim şirketler Limited şirketler  Kooperatif Yasasına göre düzenlenmiş Kooperatifler
    14. 14. 29/01/15 14 Goal Of Financial Management What should be the goal of a corporation? Maximize sales or market share? Minimize costs? Maximize profit? Maintain steady growth? Maximize the current value of the company’s stock?
    15. 15. 29/01/15 15 Shortcomings of Alternative Perspectives Minimize costs – We can minimize costs today by not purchasing new equipment or delaying maintenance, but this may not be in the best interest of the firm or its owners...
    16. 16. Shortcomings of Alternative Perspectives Profit maximizing: Maximizing a firm’s earnings after taxes. Problems:  Long-term or short-term?  Do we mean accounting profits or some measure of cash flow?  Could increase current profits while harming firm (e.g., defer maintenance). 29/01/15 16
    17. 17. 29/01/15 17 Shortcomings of Alternative Perspectives Maximize market share – This has been a strategy of many of the dot.com companies. They issued stock and then used it primarily for advertising to increase the number of “hits” to their web sites. Many firms failed to translate those ‘hits’ to money to pay the expenses etc...
    18. 18. 29/01/15 18 Stockholder’s view..  From a stockholder perspective, the purpose of a for-profit business should be to make money for its owners. How? Maximizing the current stock price increases the wealth of the owners of the firm.  The more general goal is: Maximize the current value of the owner’s equity.  There is no short run vs. long run here. The stock price should incorporate expectations about the future of the company and consider the trade-off between short-run profits and long-run profits.
    19. 19. 29/01/15 19 Maximization of Shareholder Wealth! Do not forget that if stockholders win (residual owners), it must be true that everyone else is winning also. This goal does not imply that the financial manager should take illegal or unethical actions in the hope of increasing the value of the equity.
    20. 20. 29/01/15 20 The Agency Problem  Agency relationship  Principal hires an agent to represent his/her interests  Stockholders (principals) hire managers (agents) to run the company  Agency problem  Conflict of interest between principal and agent  Management goals and agency costs  Agency costs  Direct costs: unneeded expenses for management, monitoring costs (auditors)  Indirect costs: sub optimal decisions, lost oppotunities
    21. 21. Managing Managers  Managerial compensation • Incentives can be used to align management and stockholder interests • The incentives need to be structured carefully to make sure that they achieve their goal Incentives include, stock optionsstock options,, perquisitesperquisites,, and bonusesbonuses. 29/01/15 21
    22. 22. 29/01/15 22 Managing Managers Corporate control Control of the firm rests with stockholders. They elect the board of directors, who in turn hire and fire managers. Ways of replacing managers: Proxy fights Takeover  Stakeholders (customers, suppliers, government) sometmes may attempt to exercise cotrol on the firm as well.
    23. 23. Financial Markets  Businesses interact continually with the financialfinancial markets.markets.  Financial MarketsFinancial Markets are composed of all institutions and procedures for bringing buyers and sellers of financial instruments together.  The purpose of financial markets is to efficiently allocate savings to ultimate users. 29/01/15 23
    24. 24. 29/01/15 24 Financial markets and the corporation
    25. 25. 29/01/15 25 What are some types of Markets? A market is a method of exchanging one asset (usually cash) for another asset. Physical assets vs. financial assets Financial Markets: Debt and equity securities are bought and sold Financial markets differ in detail: Type of securities traded: debt, equity, derivatives, ... How trading is conducted? outcry auction, electronic systems Who the buyers and sellers are?
    26. 26. 29/01/15 26 Primary versus Secondary Markets Financial markets function as both primary and secondary markets. Primary market: original sales of securities by corporations (or governments). The transaction raises money for the corporation. Secondary markets: securities are bought and sold after the original sale. The transaction does not raise money for the corporation.
    27. 27. 29/01/15 27 How are secondary markets organized?  By the way that orders from buyers and sellers are matched: Auction markets, An auction market has a physical location like Wall Street or Istanbul Stock Exchange (ISE). Buyers and sellers are matched directly. Dealers markets. Dealers buy and sell for themselves, at their own risk. Like car dealers; opposite of real-estate agents. Most dealer markets are called over-the-counter (OTC) markets.
    28. 28. 29/01/15 28 Auction Markets NYSE and AMEX are the two largest auction markets for stocks. NYSE is a modified auction, with a “specialist.” Specialist is a market maker.
    29. 29. 29/01/15 29 Dealer Markets Dealers buy and sell for themselves, at their own risk.  Dealers are connected electronically. Computerized quotation system keeps track of bid and ask prices, but does not automatically match buyers and sellers. NASDAQ: National Association of Securities Dealers Automated Quotation system.

    ×