Role of financial managent

1. 1-1
Chapter 1
The Role of Financial
Management
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Created by: Gregory A. Kuhlemeyer, Ph.D.
Carroll College, Waukesha, WI

2. 1-2
The Role of
Financial Management
 What is Financial
Management?
 The Goal of the Firm
 Organization of the Financial
Management Function

3. 1-3
What is Financial
Management?
Concerns the acquisition,
financing, and
management of assets
with some overall goal in
mind.

4. 1-4
Career Opportunities in
Finance
 Money & Capital Markets
Banks, Insurance Companies, Mutual
Funds, Investment Banking
 Investments
Brokerage Houses, Investment Banks,
Consultancy Firms
 Financial Management
Government, Hospitals, Schools, Banks,
Financial Institutions

5. 1-5
Investment Decisions
 What is the optimal firm size?
 What specific assets should be
acquired?
 What assets (if any) should be
reduced or eliminated?
Most important of the three
decisions.

6. 1-6
Financing Decisions
What is the best type of financing?
What is the best financing mix?
What is the best dividend policy?
How will the funds be physically
acquired?
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).

7. 1-7
Asset Management
Decisions
How do we manage existing assets
efficiently?
Financial Manager has varying degrees
of operating responsibility over assets.
Greater emphasis on current asset
management than fixed asset
management.

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What is the Goal
of the Firm?
Maximization of
Shareholder Wealth!
Value creation occurs when
we maximize the share price
for current shareholders.

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1-9
Financial Goals of the
Corporation
The primary financial goal is
shareholder wealth
maximization, which translates
to maximizing stock price.
What factors determine the
price of a company’s stock?

10. 1-10
Maximization of
Shareholder Wealth
Share Price is dependant on:
 Profit Maximization
 Projected EPS
 Riskiness of the earning stream
 Timings of the earnings
 Use of debt financing
 Dividend policy
 Investment decisions

11. 1-11
Is stock price
maximization good or
bad for society?
 Stock price maximization requires
Low cost business, high quality goods
at lowest possible cost
Development of products that customer
needs and want
Efficient service, adequate stock of
merchandise, well located business
establishments (factors that leads to
sales)
1-11

12. 1-12
The Modern Corporation
There exists a SEPARATION
between owners and managers.
Modern Corporation
Shareholders Management

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Role of Management
 An agent is an individual
authorized by another person,
called the principal, to act in
the latter’s behalf.
Management acts as an agent
for the owners (shareholders)
of the firm.

14. 1-14
Agency Theory
Agency Theory is a branch of
economics relating to the
behavior of principals and their
agents.
Jensen and Meckling developed
a theory of the firm based on
agency theory.

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1-15
Conflicts Between Managers
and Stockholders
 Managers are naturally inclined to act in
their own best interests (which are not
always the same as the interest of
stockholders).

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Agency Theory
Principals must provide incentives
so that management acts in the
principals’ best interests and then
monitor results.

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Agency Relationship
 Incentives include stock options,
perquisites, and bonuses.
 Following factors affect managerial
behavior:
 Managerial compensation plans
 Direct intervention by shareholders
 The threat of firing
 The threat of takeover

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1-18
Responsibility of the Financial
Staff
Maximize stock value by:
Forecasting and planning
Investment and financing
decisions
Coordination and control
Transactions in the
financial markets
Managing risk

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Do firms have any
responsibilities to society at
large?
Social Responsibility
Welfare of the employees,
customers, & communities
Safe working environment
Avoid pollution
Safe products
1-19

20. 1-20
Should firms behave ethically?
 Business Ethics
 Firm & Employee adherence to:
 laws and regulations related to product safety
& quality
 fair employment practices
 fair marketing & selling practices
 use of confidential information for personal
gain
 community involvement
 Bribery& illegal payments to obtain business
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1-21
Some Important Trends
 Recent corporate scandals have
reinforced the importance of business
ethics, and have spurred additional
regulations and corporate oversight.
 The effects of changing information
technology have had a profound effect on
all aspects of business finance.
 The continued globalization of business.