This document discusses the role of managerial finance. It begins by defining managerial finance as concerning the acquisition, financing, and management of assets with an overall goal in mind. It then discusses investment decisions, financing decisions, and asset management decisions. The goal of managerial finance is to maximize shareholder wealth by focusing on share price. This leads into a discussion of agency theory and how management acts as an agent for shareholders. The document outlines some ways that corporations address agency problems through executive compensation, performance shares, and stock options. It concludes by showing the typical organization of a corporate finance function.

1. Chapter 1
TThhee RRoollee ooff MMaannaaggeerriiaall
FFiinnaannccee

2. The Role of MMaannaaggeerriiaall FFiinnaaaannccee
 What is MMaannaaggeerriiaall FFiinnaannccee?
 The Goal of the Firm
 Organization of the MMaannaaggeerriiaall FFiinnaannccee
Function

3. What is MMaannaaggeerriiaall FFiinnaannccee?
Concerns the acquisition,
financing, and management of
assets with some oovveerraallll ggooaall in
mind.

4. Investment Decisions
MMoosstt iimmppoorrttaanntt ooff tthhee tthhrreeee
ddeecciissiioonnss..
 What is the optimal firm size?
 What specific assets should be acquired?
 What assets (if any) should be reduced or
eliminated?

5. Financing Decisions
Determine how tthhee aasssseettss ((LLHHSS ooff
bbaallaannccee sshheeeett)) wwiillll bbee ffiinnaanncceedd ((RRHHSS
ooff bbaallaannccee sshheeeett))..
 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?

6. Asset Management Decision
 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.

7. MMaaxxiimmiizzaattiioonn ooff
SShhaarreehhoollddeerr WWeeaalltthh!!
Value creation occurs when we
maximize the share price for current
shareholders.

8. Shortcomings of Alternative
Perspectives
PPrrooffiitt MMaaxxiimmiizzaattiioonn
Maximizing a firm’s earnings after taxes.
PPrroobblleemmss
 Could increase current profits while harming firm (e.g.,
defer maintenance, issue common stock to buy T-bills,
etc.).
 Ignores risk.

9. Shortcomings of
Alternative Perspectives
EEaarrnniinnggss ppeerr SShhaarree MMaaxxiimmiizzaattiioonn
Maximizing earnings after taxes divided
by shares outstanding.
PPrroobblleemmss
 Does not specify timing or duration of expected returns.
 Ignores risk.
 Calls for a zero payout dividend policy.

10. Strengths of Shareholder
Wealth Maximization
 Takes account of: current aanndd ffuuttuurree pprrooffiittss aanndd
EEPPSS; tthhee ttiimmiinngg,, dduurraattiioonn,, aanndd rriisskk ooff pprrooffiittss aanndd
EEPPSS; ddiivviiddeenndd ppoolliiccyy; and all other relevant
factors.
 Thus, sshhaarree pprriiccee serves as a barometer for
business performance.

11. The Modern Corporation
Modern Corporation
Shareholders Management
There exists a SEPARATION between
owners and managers.

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

13. Agency Theory
Jensen and Meckling developed
a theory of the firm based on
aaggeennccyy tthheeoorryy.
 AAggeennccyy TThheeoorryy is a branch of economics
relating to the behavior of principals and
their agents.

14. CCoonnfflliicctt ooff GGooaallss :: AAggeennccyy PPrroobblleemm
AAnn aaggeennccyy pprroobblleemm iiss tthhee ccoonnfflliicctt ooff ggooaallss
bbeettwweeeenn aa ffiirrmm’’ss sshhaarreehhoollddeerrss aanndd iittss
mmaannaaggeerrss..
For example, decision to establish a subsidiary in
a particular area or to expand the business
may be from the desire of managers to
receive more responsibility and
compensation.

15. CCoonnfflliicctt ooff GGooaall :: AAggeennccyy PPrroobblleemm
 AAnn aaggeennccyy pprroobblleemm eexxiisstt mmoossttllyy iinn bbiigg
ccoorrppoorraattiioonnss wwhheerree mmaannaaggeemmeenntt iiss sseeppaarraatteedd
ffrroomm oowwnneerrsshhiipp.. IInn ssoollee pprroopprriieettoorrsshhiipp iitt
ddooeess nnoott eexxiisstt
 AAggeennccyy pprroobblleemm iiss mmoorree vviissiibbllee iinn MMNNCCss
tthhaann ddoommeessttiicc ccoommppaanniieess..

16. Corporate CCoonnttrrooll ttoo rreedduuccee AAggeennccyy PPrroobblleemm
Principals must provide iinncceennttiivveess so that management acts
in the principals’ best interests and then mmoonniittoorr results.
• MMaannggeerriiaall CCoommppeennssaattiioonn::TToo ppaarrttiiaallllyy ccoommppeennssaattee tthhee
mmaannaaggeemmeenntt aanndd bbooaarrdd mmeemmbbeerrss bbyy ooffffeerriinngg ssttoocckk ttoo tthheemm ssoo tthhaatt tthheeyy
ttaakkee ddeecciissiioonnss tthhaatt mmaaxxiimmiizzeess tthhee vvaalluuee ooff tthhee ffiirrmm
aa.. PPeerrffoorrmmaannccee SShhaarreess:: AA ttyyppee ooff iinncceennttiivvee ppllaann iinn wwhhiicchh mmaannaaggeerrss
aarree aawwaarrddeedd sshhaarree ooff ssttoocckk oonn tthhee bbaassiiss ooff tthhee ffiirrmm’’ss ppeerrffoorrmmaannccee oovveerr
ggiivveenn iinntteerrvvaallss wwiitthh rreessppeecctt ttoo eeaarrnniinnggss ppeerr sshhaarree oorr ootthheerr mmeeaassuurreess..
bb.. SSttoocckk OOppttiioonnss:: AAlllloowwss mmaannaaggeerrss ttoo ppuurrcchhaassee ssttoocckk aatt ssoommee ffuuttuurree
ttiimmee aatt aa ggiivveenn pprriiccee

17. Corporate CCoonnttrrooll ttoo rreedduuccee AAggeennccyy PPrroobblleemm
22.. TThhee TThhrreeaatt ooff FFiirriinngg::
 IItt iiss aann eeffffeeccttiivvee mmeeaassuurree ttooddaayy bbeeccaauussee oowwnneerrsshhiipp nnooww aa
ddaayyss nnoott wwiiddeellyy ddiissttrriibbuutteedd aass iinn tthhee ppaasstt..
 MMaannaaggeemmeenntt ccoonnttrrooll oovveerr vvoottiinngg mmeecchhaanniissmm iiss aallssoo nnoott ssoo
ssttrroonngg aass iinn tthhee ppaasstt
 TTooddaayy iitt iiss eeaassiieerr ffoorr ddiissssiiddeenntt sshhaarreehhoollddeerrss ttoo ggaaiinn eennoouugghh
vvootteess ttoo oovveerrtthhrrooww tthhee mmaannaaggeerrss..
 RReecceenntt eexxaammpplleess ooff oouussttiinngg tthhee mmaannaaggeerrss aarree CCooccaa CCoollaa,,
XXeerrooxx,, UUnniitteedd AAiirrlliinneess eettcc..

18. Corporate CCoonnttrrooll ttoo rreedduuccee AAggeennccyy PPrroobblleemm
33.. HHoossttiillee TTaakkeeoovveerr tthhrreeaatt:: TThhee ffeeaarr ooff ttaakkiinngg
oovveerr tthhee ffiirrmm bbyy tthhee bbyy ssoommee ootthheerr bbiigg ffiirrmmss
aaggaaiinnsstt tthhee ddeessiirree ooff tthhee mmaannaaggeerrss,, iiff tthhee ffiirrmm
iiss iinneeffffiicciieennttllyy mmaannaaggeedd.. TThhiiss tthhrreeaatt mmaayy
eennccoouurraaggee tthhee mmaannaaggeemmeenntt ttoo rruunn tthhee ffiirrmm aass
ppeerr tthhee ddeessiirree ooff tthhee sshhaarreehhoollddeerrss..

19. Social Responsibility
 Wealth maximization does not preclude the
firm from being ssoocciiaallllyy rreessppoonnssiibbllee.
 Assume we view the firm as producing both
private and social goods.
 Then sshhaarreehhoollddeerr wweeaalltthh mmaaxxiimmiizzaattiioonn
remains the appropriate goal in governing the
firm.

20. Organization of the Financial
Management Function
Board of Directors
President
(Chief Executive Officer)
Vice President
Operations
Vice President
Marketing
VP of
Finance

21. Organization of the Financial
Management Function
VP of Finance
Treasurer
Capital Budgeting
Cash Management
Credit Management
Dividend Disbursement
Fin Analysis/Planning
Pension Management
Insurance/Risk Mngmt
Tax Analysis/Planning
Controller
Cost Accounting
Cost Management
Data Processing
General Ledger
Government Reporting
Internal Control
Preparing Fin Stmts
Preparing Budgets
Preparing Forecasts

22. Multinational Corporations
 A multi national corporation is a firm that
operate in two or more nations. International
operations are important to both
 Individual and
 National Economy

23. Reasons for Companies going for
multinational
 To seek new markets
 To seek raw materials
 To seek new technology
 To seek production efficiency
 To avoid Political and regulatory hurdles

24. Distinguishing characteristics of Multinational
Managerial Finance over Domestic Managerial Finance
 Different Currency Denomination
 Economic and Legal Ramifications
 Difference of languages
 Difference of culture
 Role of Government
 Political Risk