Introduction to financial management ppt @ mba

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Introduction to financial management ppt @ mba

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Introduction to financial management ppt @ mba

  1. 1. Introduction to Financial Management <ul><li>Forms of Businesses </li></ul><ul><li>Goals of the Corporation </li></ul><ul><li>Stock Prices and Intrinsic Value </li></ul><ul><li>Some Recent Trends </li></ul><ul><li>Conflicts Between Managers and Shareholders </li></ul>
  2. 2. Alternative Forms of Business Organization <ul><li>Proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>Corporation </li></ul>
  3. 3. 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>
  4. 4. 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>
  5. 5. <ul><li>Double Taxation of Corporate Profits/Income </li></ul><ul><li>Assume Corporate and Individual Tax = 50% </li></ul><ul><li>Earnings Before Taxes $100 EBT </li></ul><ul><li>($50) Corporate Tax </li></ul><ul><li>Net Income After Tax $50 NIAT (Profits) </li></ul><ul><li>Assume 100% Div. Payout $50 Dividend Income </li></ul><ul><li>($25) Personal Income Tax </li></ul><ul><li>$25 After-tax Income </li></ul><ul><li>New Tax Code (2003): Max. Tax Rate of 15% for DIV </li></ul><ul><li>Earnings Before Taxes $100 EBT </li></ul><ul><li> ($50) Corporate Tax </li></ul><ul><li>Net Income After Tax $50 NIAT </li></ul><ul><li>Assume 100% DIV $50 Dividend Income </li></ul><ul><li>($7.50) Income Tax @ 15% </li></ul><ul><li>$42.50 After-tax Income </li></ul>
  6. 6. <ul><li>Corporate Income Taxes – 2006 </li></ul><ul><li>More than But not more than Then the tax is of the amount over </li></ul><ul><li>$0 $50,000 15% $0 </li></ul><ul><li>$50,000 $75,000 $7,500 + 25% $50,000 </li></ul><ul><li>$75,000 $100,000 $13,750 + 34% $75,000 </li></ul><ul><li>$100,000 $335,000 $22,250 + 39% $100,000 </li></ul><ul><li>$335,000 $10 million $113,900 + 34% $335,000 </li></ul><ul><li>$10 million $15 million $3,4 million + 35% $10 million </li></ul><ul><li>$15 million $18.33 million $5.15 million + 38% $15 million </li></ul><ul><li>$18.33 million --35% -- </li></ul>
  7. 7. <ul><li>2005 federal personal income tax rates Ordinary taxable income for use in filing returns due April 15, 2006. </li></ul><ul><li>Tax rate Single filers Married filing jointly Married filing separately Head of household </li></ul><ul><li>10% Up to $7,300 Up to $14,600 Up to $7,300 Up to $10,450 </li></ul><ul><li>15% $7,301 - $29,700 $14,601 - $59,400 $7,301 - $29,700 $10,451 - $39,800 </li></ul><ul><li>25% $29,701 - $71,950 $59,401 - $119,950 $29,701 - $59,975 $39,801-$102,800 </li></ul><ul><li>28% $71,951 - $150,150 $119,951 - $182,800 $59,976 - $91,400 $102,801 - 166,450 </li></ul><ul><li>33% $150,151 - $326,450 $182,801 - $326,450 $91,401 - $163,225 $166,451 - $326,450 </li></ul><ul><li>35% $326,451 or more $326,451 or more $163,226 or more $326,451 or more </li></ul>
  8. 8. Alternative Forms of Business Organization <ul><li>Sole proprietorship – 73% of firms, but only 7% of sales revenue </li></ul><ul><li>Partnership – 7% of firms, 5% of sales </li></ul><ul><li>Corporation – 20% of firms, but 88% of sales revenue. </li></ul>
  9. 9. 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>
  10. 10. 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>
  11. 11. Stock Prices and Intrinsic Value <ul><li>In equilibrium, a stock’s price should equal its “true” or intrinsic value. </li></ul><ul><li>To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value. </li></ul><ul><li>Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run. </li></ul>
  12. 12. Determinants of Intrinsic Value and Stock Prices (Figure 1-1)
  13. 13. Some Important Trends <ul><li>Recent corporate scandals have reinforced the importance of business ethics, and have spurred additional regulations and corporate oversight. </li></ul><ul><li>The effects of changing information technology have had a profound effect on all aspects of business finance. </li></ul><ul><li>The continued globalization of business. </li></ul>
  14. 14. Financial Management Issues of the New Millennium <ul><li>The effect of changing technology </li></ul><ul><li>The globalization of business </li></ul><ul><li>1. Improvements in communications and transportation – lower transactions cost </li></ul><ul><li>2. Increased power of consumers – more choice, consumer sovereignty </li></ul><ul><li>3. Increased cost of developing new products – global markets spread fixed costs over more units </li></ul><ul><li>4. MNCs must be able to shift production globally to take advantage of cost efficiencies. </li></ul>
  15. 15. Percentage of Revenue and Net Income from Overseas Operations for 10 Well-Known Corporations, 2001 Company % of Revenue from overseas % of Net Income from overseas Coca-Cola 60.8 35.9 Exxon Mobil 69.4 60.2 General Electric 32.6 25.2 General Motors 26.1 60.6 IBM 57.9 48.4 JP Morgan Chase & Co. 35.5 51.7 McDonald’s 63.1 61.7 Merck 18.3 58.1 3M 52.9 47.0 Sears, Roebuck 10.5 7.8
  16. 16. Conflicts Between Managers and Stockholders <ul><li>Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders). </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>
  17. 17. Responsibility of the Financial Staff <ul><li>Maximize stock value by: </li></ul><ul><ul><li>Forecasting and planning </li></ul></ul><ul><ul><li>Investment and financing decisions </li></ul></ul><ul><ul><li>Coordination and control </li></ul></ul><ul><ul><li>Transactions in the financial markets </li></ul></ul><ul><ul><li>Managing risk </li></ul></ul>

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