Management - Asset Managment - Lecture Slides, Slides for Management Fundamentals
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alaka26 July 2013

Management - Asset Managment - Lecture Slides, Slides for Management Fundamentals

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Asset Management is an important subject in Economics. In these Lecture Slides, following concepts are discussed : Making Regulations, Step Process, Agency Publishes, Proposing New Regulation, New Regulation, Federal Re...
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Microsoft PowerPoint - Management [Compatibility Mode]

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 

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1-2

Career Opportunities in Finance 

• Money and capital markets  • Investments  • Financial management 

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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 

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1-4

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

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1-5

Financial Management Issues of the  New Millennium 

• The effect of  changing  technology 

• The globalization of  business 

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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

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1-7

Alternative Forms of Business  Organization 

• Sole proprietorship  • Partnership  • Corporation 

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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   

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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 

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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? 

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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). 

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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 

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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 

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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. 

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1-15

Factors that affect stock price 

• Projected cash flows  to shareholders 

• Timing of the cash  flow stream 

• Riskiness of the cash  flows 

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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. 

  

 

 

 

n

1t t

t

n n

2 2

1 1

. k)(1

CF

k)(1 CF

k)(1 CF

k)(1 CF

Value 

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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 

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