Lecture1 overview (1)

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1
Contemporary FinancialContemporary Financial
Management, 12th EditionManagement, 12th Edition
by
Moyer, McGuigan, Rao,
and Kretlow
Prepared by William T. Chittenden
Texas State University

Chapter 1
The Role and Objective of
Financial Management

Introduction
 Questions Faced by Financial Managers
 Will a particular investment be successful?
 Where will the funds come from to finance the
investment?
 Does the firm have adequate cash or access
to cash to meet its daily operating needs?
 How much inventory should we hold?
 Is a merger or acquisition advisable?
3

What is the primary goal of the
firm?
4

Maximizing Shareholder Wealth as
a Primary Goal
 The most widely accepted objective of the
firm is to maximize shareholder wealth
 Shareholder Wealth = Number of shares
outstanding × Market price per share
 Management should seek to maximize the
present value of the expected future returns
to the shareholders of the firm
5

 Stakeholders and their Concerns
 Stockholders
 Customers
 Employees
 Suppliers
 Communities in which the firm operates
 Divergent Objectives
6
a Primary Goal

 Agency Problems
 Agency Relationships
 Principals
 Agent
 Stockholders and Creditors
 Stockholders and Managers
 Agency Problems and Costs
7
a Primary Goal

 Agency Problems
 Corporate Governance
 The board of directors of a corporation should
have a majority of independent directors
 The committee responsible for nominating
members of the board of directors must be
composed only of independent directors
 The post of chairman of the board of directors
should be split from the CEO position
 All members of the audit and compensation
committees must be independent directors
8
a Primary Goal

 Agency Problems
 Managerial Compensation
 Properly designed compensation contracts can
help to align shareholder–management conflicts
 Stock Options
 Exercise Price
 Restriced Stock
 Performance Shares
 Threat of Takeovers
 Takeovers can serve as an important deterrent to
shareholder-management conflicts
9
a Primary Goal

Is maximizing profits the
same as maximizing
shareholder wealth?
10

Maximization of Shareholder
Wealth: Managerial Strategies
 Profit Maximization
 Maximizing profits is typically not the
same as maximizing shareholder wealth.
 Profit maximization lacks a time dimension
(long-term versus short-term)
 GAAP results in hundreds of definitions of
profits (or earnings or income)
 Profit maximization ignores risk
11

 Determinants of Value
 Cash Flow
 Timing of Cash Flows
 Risk
12

 Managerial Actions to Influence Value
 Products and services offered for sale
 Production technology
 Marketing and distribution network
 Investment strategies
 Employment policies and compensation
packages for managers and other employees
 Ownership form
 Capital structure
 Working capital management policies
 Dividend policies
13

14

Forms of Business Organizations
 Sole proprietorship
 Partnership
 Corporation
15

 Sole proprietorship
 Owned by one person
 Represent 75 percent of all businesses
 Account for less than 6 percent of total
business revenues
 Advantage
 Easy formation
 Disadvantages
 Unlimited liability
 Difficulty raising funds
16

 Partnerships
 Owned by two or more persons
 About 7 percent of US businesses, 5 percent
of business revenues
 Classified as general or limited
 General partners work in the partnership
17

 Partnerships
 Advantages
 Limited partners’ liability is limited to what is
specified in the agreement.
 Disadvantages
 Partnership dissolves when a general partner dies
 Unlimited liability for general partners
18

 Corporation
 Advantages
 Limited Liability
 Permanency
 Flexibility
 Ability to Raise Capital
 Disadvantages
 Ownership is often separated from management
19

 Corporation
 Corporate Organization and Governance
 Stockholders elect a board of directors
 Board of directors then elect the officers
 Chairman of the board
 Chief executive officer (CEO)
 Chief operating officer (COO)
 President
 Chief financial officer (CFO)
 Vice presidents
 Treasurer
 Secretary
20
Management

 Corporation
 Corporate Securities
 Priority of Corporate Securities
 Debt Securities
 Preferred Stock
 Common Stock
21

 Other Types of Business Organizations
 Subchapter S Corporation
 Limited Liability Company
 Limited Liability Partnership
22

Organization of the Financial
Management Function
 Chief Financial Officer
 Oversees:
 Accounting
 Treasury
 Tax
 Audit
23

Management Function
 Controller
 Oversees:
 Financial Accounting
 Cost Accounting
 Taxes
 Data Processing
24

Management Function
 Treasurer
 Oversees:
 Cash and Marketable Securities Management
 Capital Budgeting Analysis
 Financial Planning
 Investor Relations
 Pension Fund Management
25

26

Management Function
 Financial Management and Other
Disciplines
 Accounting
 Financial managers are primarily concerned with
a firm’s cash flow
27

Management Function
Disciplines
 Economics
 Microeconomics
 Financial managers use the concepts of setting
marginal cost equal to marginal revenue when making
long-term investment decisions and when managing
working capital
 Macroeconomics
 Financial managers should recognize and understand
how monetary and fiscal policies affect the economy
and the cost of funds and the availability of credit
28

Management Function
Disciplines
 Marketing, Production, Quantitative
Methods, and Human Resources
Management
 All are indirectly related to the key day-to-day
decisions made by financial managers
29

30

Career Opportunities in Finance
 Corporate Finance
 Commercial Banks
 Securities Brokers
 Investment Banks
 Mutual Funds
 Pension Funds
 Real Estate Companies
 Insurance Companies
31

Professional Finance Affiliations
and Certifications
 Organizations
 Financial Executives Institute
 Institute of Chartered Financial Analysts
 Financial Management Association
 Certifications
 Certified in Financial Management (CFM)
 Certified Financial Planner (CFP)
 Chartered Financial Analyst (CFA)
 Certified Treasury Professional (CTP)
32

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