An overview of managerial finance-IBF-CH#1

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An overview of managerial finance-IBF-CH#1

  1. 1. An Overview of Managerial Finance 1
  2. 2. What is Finance? Finance is concerned with decisions about money (Cash Flows) Finance decisions deal with how money is raised and used Everything else being equal: More value is preferred to less The sooner cash is received the more value it has Less risky assets are more valuable than riskier assets 3
  3. 3. General Areas of Finance Financial Markets and Institutions Banks, Insurance Companies, Saving & Loans, Credit Unions etc. Investments Stock Brokerage firms, Financial Institutions, Investment Companies, Insurance Companies etc. Financial Services Financial Consultants, Auditing Firms etc Managerial Finance All type of Firms making Financial Decisions concerning cash flows 4
  4. 4. Finance in the OrganizationalStructure of the Firm •Manage cash & Marketable Securities •Plan how the firm is financed •Manage Risk •Oversee pension fund Board of Directors President (CEO)Vice-President: Vice-President: Vice-President: Vice-President: Sales Operations (COO) Finance (CFO) Information Systems (CIO) Director of Financial Credit Inventory Tax Capital Treasurer Controller and Cost Manager Manager Department Budgeting Accounting 5
  5. 5. Alternative Forms ofBusiness Organization Proprietorship Partnership Corporation 6
  6. 6. Proprietorship Advantages: Ease of formation Subject to few government regulations No corporate income taxes Limitations: Unlimited personal liability Limited life Transferring ownership is difficult Difficult to raise capital 7
  7. 7. Partnership Like a proprietorship, except two or more owners A partnership has roughly the same advantages and limitations as a proprietorship 8
  8. 8. Corporation Advantages: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages: Cost of set-up and report filing Double taxation 9
  9. 9. Business Organized as a Corporation:Value Maximized Limited liability reduces risk increasing market value Ease of raising capital allows taking advantage of growth opportunities Ownership can be easily transferred thus investors would be willing to pay more for a corporation 11
  10. 10. Goals of the Corporation Primary goal:stockholder wealth maximization—translates to maximizing stock price. Managerial incentives Provide valuable incentives to keep the interest of management alive and inline with stockholder wealth maximization. Social responsibility The concept that businesses should be actively concerned with the welfare of society at large. 12
  11. 11. Managerial Actions toMaximize Stockholder Wealth Capital Structure Decisions Decision about how much and what types of debt and equity should be used to finance the firm. Capital Budgeting Decisions Decision as to what types of assets should be purchased to help generate future cash flows. Dividend Policy Decisions Decisions as to how much of current earnings to pay out as dividends rather than to retain for reinvestment in the firm. 13
  12. 12. Value of the Firm Market Factors/Considerations Economic Conditions Government Regulations and Rules Competitive EnvironmentFirm Factors/Considerations Investor Factors/Considerations Normal Operations (Revenues and Expenses) Income/Savings Financing Policy (Capital Structure) Age/Lifestyle Investing Policy (Capital Budgeting) Interest Rates Dividend Policy Risk Attitude Net Cash Flows, CF Rates of Return, r ^ ^ N ^ ^ C1 F C 2 F CN F Ct F = 1 + 2 +...+ N = Σ t (1+r) ( 1+r) (1+r) (1+r) t =1 14
  13. 13. Factors Influenced by Managersthat Affect Stock Price Projected earnings per share Timing of earnings streams Risk of projected earnings Use of debt (capital structure) Dividend policy 15
  14. 14. Agency Relationships An agency relationship exists whenever a principal hires an agent to act on his or her behalf. An agency problem results when the agent makes decisions that are not in the best interest of principals 16
  15. 15. Stockholders versus Managers Managers are naturally inclined to act in their own best interests. Mechanisms to motivate managers to act in shareholder’s best interest Managerial compensation (incentives) Performance shares awarded on basis of EPS, executive stock purchased at future time at given price, restricted stock grants to employees for some time in future. The threat of firing  Possible now due to ownership by few large institutions like pension fund, mutual funds etc like cocacola, UA. Shareholder intervention  Big Funds now closely monitor firms and influence management decisions when ever needed. Threat of takeover  Hostile takeovers, management is fired. 17
  16. 16. Business Ethics Webster: “A standard of conduct and moral behavior.” Business Ethics: A company’s attitude and conduct toward its employees, customers, community, and stockholders 18
  17. 17. Multinational CorporationsFive reasons firms go“international” markets 1. To seek new 2. To seek raw materials 3. To seek new technology 4. To seek production efficiency 5. To avoid political and regulatory hurdles 21
  18. 18. Factors Distinguishing DomesticFirms from Multinational Firms Different currency denominations Economic and legal ramifications Language differences Cultural differences Role of governments Political risk 23
  19. 19. Thank you 25

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