Financial Management

1. Financial
Management
Theory and
Practice
Tenth Edition
Eugene F. Brigham
Michael C. Ehrhardt
Chapter 1
Goals and Governance of the
Firm
Instructor: Sanam Taimoor
Institute of Business Management

2. Topics
• What is Financial Management
• Finance and You
• How are companies organized
• Goals of Corporations
• Business Ethics and Social Responsibility
• Agency Relationship
2Chapter 1 Brigham & Ehrhardt 10 ed

3. What is Financial Management
The planning, directing, monitoring, organizing,
and controlling of the monetary resources of
an organization
• Main issues in financial management
– Factors determining company’s stock price
– Managers’ choices to add value
– Ensuring sufficient cash levels
3Chapter 1 Brigham & Ehrhardt 10 ed

4. Finance and Your Career
• Capital Markets and Institution
– Stock Markets, Commodities Markets, Banks,
Insurance Companies, Mutual Funds
• Investments
– Brokerage Houses
– Main function in investments:
• Sales
• Analysis of individual securities
• Determining optimal mix of securities
• Financial Management
4Chapter 1 Brigham & Ehrhardt 10 ed

5. Forms of Organizations
• Sole Proprietorship
• Partnership
• Corporations
• Note: Read Pages 6-9
5Chapter 1 Brigham & Ehrhardt 10 ed

6. Finance in Organizational Structure of
the Firm
Board of
Directors
CEO
Vice
President
Sales
Vice
President
Finance
Treasurer
Credit
Manger
Inventory
Manager
Capital
Budgeting
Manager
Controller
Cost
Accountant
Financial
Accountant
Tax
Accountant
Vice
President
Marketing
6Chapter 1 Brigham & Ehrhardt 10 ed

7. Goals of the Corporations
• What should be the main goal of the
organization?
• Stock Price Maximization and not Profit
Maximization
– Stockholders are society
– Consumer Benefit
– Employee Benefit
7Chapter 1 Brigham & Ehrhardt 10 ed

8. How to maximize Stock Price?
• What determines stock price?
– Company’s ability to generate cash flows now and
in the future
• Determinants of cash flows
– Unit Sales
– After-tax operating margins
– Capital Requirement
8Chapter 1 Brigham & Ehrhardt 10 ed

9. Ethics and Social Responsibility
• Business Ethics
– “Standard of conduct and moral behavior”
– “A company’s attitude and conduct towards its
employees, customers, community and
stockholders”
(Fundamentals of Financial Management. Brigham and
Houston – 10th Edition)
• Social Responsibility
– Only shareholders’ interests or welfare of
employees and society as well?
9Chapter 1 Brigham & Ehrhardt 10 ed

10. Agency Relationship
• Agency relationship arises when a principle
hires an agent to perform duties on behalf of
the principle
• Within financial management primary agency
relationships are
– Between stockholders and managers
– Between stockholders and creditors
10Chapter 1 Brigham & Ehrhardt 10 ed

11. Agency Conflict
• Occurs when agents behave in their own
interests rather then those of the principle’s
• Ways to avoid agency conflicts”
– Managerial Compensation
– Direct intervention by shareholders
– Threat of firing
– Threat of takeover
11Chapter 1 Brigham & Ehrhardt 10 ed