Financial Management: Career Opportunities, Role of Finance, Issues, and Goals, Slides of Management Fundamentals

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1-11-

CHAPTER

An

Overview

of

Financial

Management



Career Opportunities  Issues of the New Millennium  Forms of Businesses  Goals of the Corporation  Agency Relationships

1-

Career

Opportunities

in

Finance

•

Money

and

capital

markets

•

Investments

•

Financial

management

1-

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

1- Role of Finance in a Typical Business Organization Board of Directors President VP: Sales VP: Finance VP: Operations Treasurer Controller Credit Manager Inventory Manager Capital Budgeting Director Cost Accounting Financial Accounting Tax Department

1- Financial Management Issues of the New Millennium

The effect of changing technology - The globalization of business

1-

Percentage

of

Revenue

and

Net

Income

from

Overseas

Operations

for

Well

‐

Known

Corporations,

Company % of Revenuefrom overseas % of Net Income from overseas Coca-Cola

Exxon Mobil

General Electric

General Motors

IBM

JP Morgan Chase & Co.

McDonald’s

Merck

3M

Sears, Roebuck

1- Alternative Forms of Business Organization

•

Sole

proprietorship

•

Partnership

•

Corporation

1- Sole proprietorships & Partnerships

•

Advantages

–

Ease of formation

Subject to few regulations - No corporate income taxes

•

Disadvantages

–

Difficult to raise capital

Unlimited liability - Limited life

1-

Corporation

•

Advantages

–

Unlimited life

Easy transfer of ownership - Limited liability - Ease of raising capital

•

Disadvantages

–

Double taxation

Cost of set

‐

up and report filing

1- 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?

1- 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).

1-

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

1-

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

1-

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.

1-

Factors

that

affect

stock

price

•

Projected cash flows to shareholders

Timing of the cash flow stream - Riskiness of the cash flows

1-

Basic

Valuation

Model

To estimate an asset’s value, one estimates the cash flow for each period t (CF t ), 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.



          n 1 t t t n n 2 2 1 1 . k) ( CF k) ( CF k) ( CF k) ( CF Value 

1-

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