PPT

1. 1-1
CHAPTER 1
An Overview of Financial
Management
 Career Opportunities
 Issues of the New Millennium
 Forms of Businesses
 Goals of the Corporation
 Agency Relationships

2. 1-2
Career Opportunities in
Finance
 Financial Analyst: Analyzes financial data to help businesses make investment decisions, budget forecasts, and financial strategies.
 Treasurer: Manages an organization’s financial operations, including liquidity, investments, and risk management.
 Finance Manager/Director: Oversees an organization’s financial health, budgeting, forecasting, and strategic planning.
 Investment Banker: Helps companies raise capital, advises on mergers and acquisitions, and works on complex financial transactions.
 Mergers & Acquisitions (M&A) Advisor: Specializes in advising companies on acquiring or merging with other businesses.
 Equity Research Analyst: Provides research and analysis on stocks, industries, and market trends to help investors make informed decisions.
 Private Equity Analyst: Works for private equity firms, evaluating and managing investments in companies to achieve returns.
 Venture Capitalist: Invests in early-stage startups, helping them grow in exchange for equity stakes.
 Portfolio Manager: Oversees a fund's investment portfolio, ensuring proper asset allocation and risk management.
 Among others

3. 1-3
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

4. 1-4
Role of Finance in a Typical
Business Organization
nBoard of Directors
nPresident
nVP: Sales nVP: Finance nVP: Operations
nTreasurer nController
nCredit Manager
nInventory Manager
nCapital Budgeting Director
nCost Accounting
nFinancial Accounting
nTax Department

5. 1-5
Financial Management Issues of
the New Millennium
 The effect of changing technology
 The globalization of business
 Currency Fluctuations: Exchange rate volatility can impact the value of international revenue, costs, and investments. Financial managers need to develop strategies for hedging foreign exchange
risk.
 Cross-Border Transactions: Managing finances across multiple countries involves dealing with differing regulations, tax laws, and financial reporting standards, requiring enhanced compliance
efforts.
 Automation and AI: The rise of artificial intelligence, machine learning, and automation tools is changing how financial analysis, decision-making, and customer service are handled. Financial
managers need to stay ahead of technological innovations.
 Blockchain: Blockchain technology is disrupting traditional financial systems, especially in payments, lending, and record-keeping. Managers must assess how blockchain can be leveraged for more
efficient and secure transactions.
 Cybersecurity: With the increasing reliance on digital platforms, financial institutions face a growing risk of cyberattacks, necessitating investment in robust security measures to protect financial
data.
 ESG Integration: Investors and stakeholders increasingly prioritize companies that demonstrate strong environmental, social, and governance practices. Financial managers must assess the financial
implications of adopting sustainable practices and make informed decisions on sustainable investments.
 Skills Gap: Financial management is becoming increasingly complex, requiring managers to possess not only strong financial expertise but also skills in data analytics, leadership, and strategic
thinking. Bridging this skills gap is essential for building strong financial teams.

6. 1-6
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

7. 1-7
Alternative Forms of
Business Organization
 Sole proprietorship
 Partnership
 Corporation

8. 1-8
Sole proprietorships &
Partnerships
 Advantages
 Ease of formation
 Subject to few regulations
 No corporate income taxes
 Disadvantages
 Difficult to raise capital
 Unlimited liability
 Limited life

9. 1-9
Corporation
 Advantages
 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital
 Disadvantages
 Double taxation
 Cost of set-up and report filing

10. 1-10
Financial Goals of the
Corporation
 The primary financial goal is
shareholder wealth maximization,
which translates to maximizing stock
price.
 Do firms have any responsibilities to
society at large?
 Is stock price maximization good or
bad for society?
 Should firms behave ethically?

11. 1-11
Is stock price maximization the
same as profit maximization?
 No, despite a generally high correlation
amongst stock price, EPS, and cash flow.
 Current stock price relies upon current
earnings, as well as future earnings and
cash flow.
 Some actions may cause an increase in
earnings, yet cause the stock price to
decrease (and vice versa).

12. 1-12
Agency relationships
 An agency relationship exists
whenever a principal hires an agent
to act on their behalf.
 Within a corporation, agency
relationships exist between:
 Shareholders and managers
 Shareholders and creditors

13. 1-13
Shareholders versus
Managers
 Managers are naturally inclined to act
in their own best interests.
 But the following factors affect
managerial behavior:
 Managerial compensation plans
 Direct intervention by shareholders
 The threat of firing
 The threat of takeover

14. 1-14
Shareholders versus
Creditors
 Shareholders (through managers)
could take actions to maximize stock
price that are detrimental to
creditors.
 In the long run, such actions will raise
the cost of debt and ultimately lower
stock price.

15. 1-15
Factors that affect stock
price
 Projected cash
flows to
shareholders
 Timing of the cash
flow stream
 Riskiness of the
cash flows

16. 1-16
Basic Valuation Model
 To estimate an asset’s value, one estimates the
cash flow for each period t (CFt), the life of the
asset (n), and the appropriate discount rate (k)
 Throughout the course, we discuss how to
estimate the inputs and how financial
management is used to improve them and thus
maximize a firm’s value.
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n
1
t
t
t
n
n
2
2
1
1
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k)
(1
CF
k)
(1
CF
k)
(1
CF
k)
(1
CF
Value 

17. 1-17
Factors that Affect the
Level and Riskiness of Cash
Flows
 Decisions made by financial
managers:
 Investment decisions
 Financing decisions (the relative use of
debt financing)
 Dividend policy decisions
 The external environment