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    - The document discusses an introductory finance course, including key topics like capital budgeting, capital structure, and working capital management. - It notes that in a large corporation, the chief financial officer oversees two groups: the controller's office which handles accounting and the treasurer's office which focuses on functions like capital budgeting and financial planning. - The overall goal of corporate financial management is to maximize the current market value or share price of the firm.

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    - The document discusses an introductory finance course, including key topics like capital budgeting, capital structure, and working capital management. - It notes that in a large corporation, the chief financial officer oversees two groups: the controller's office which handles accounting and the treasurer's office which focuses on functions like capital budgeting and financial planning. - The overall goal of corporate financial management is to maximize the current market value or share price of the firm.

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    62 views26 pages

    FIN220 Tutorial Chapter 1

    Uploaded by

    saif
    - The document discusses an introductory finance course, including key topics like capital budgeting, capital structure, and working capital management. - It notes that in a large corporation, the chief financial officer oversees two groups: the controller's office which handles accounting and the treasurer's office which focuses on functions like capital budgeting and financial planning. - The overall goal of corporate financial management is to maximize the current market value or share price of the firm.

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    of 26

    FIN220 TUTORIAL

    Chapter 1 Introduction to Financial Management

    Department of Economics and Finance


    College of Business Administration
    University of Bahrain
    Question

    LO 1. What are the three types of financial


    management decisions?
    For each type of decision, give an example of a business
    transaction that would be relevant.
    • Capital budgeting (deciding on whether to expand a manufacturing
    plant),
    • Capital structure (deciding whether to issue new equity and use the
    proceeds to retire outstanding debt), and
    • Working capital management (modifying the firm’s credit collection
    policy with its customers).
    Question

    LO 3. 1.4 Corporate Finance Organization. In a large corporation,


    what are the two distinct groups that report to the chief financial
    officer?
    Which group is the focus of corporate finance?
    The treasurer’s office and the controller’s office are the two
    primary organizational groups that report directly to the
    chief financial officer.
    • The controller’s office handles cost and financial
    accounting, tax management, and management
    information systems.
    • The treasurer’s office is responsible for cash and credit
    management, capital budgeting, and financial
    planning. Therefore, the study of corporate finance is
    concentrated within the functions of the treasurer’s
    office.
    A Financial Controller's duties and responsibilities generally
    include:
    •Developing financial strategy, including risk minimization plans
    and opportunity forecasting.
    •High-level financial reporting and analysis.
    •Regular budget consolidation.
    •Cash flow management.
    •Improving efficiencies and reducing costs across the business.
    Main responsibilities of the Treasurer
    •General financial oversight. Oversee and present budgets,
    accounts and financial statements to the management
    committee. ...
    •Funding, fundraising and sales. ...
    •Financial planning and budgeting. ...
    •Financial reporting. ...
    •Banking, book-keeping and record-keeping. ...
    •Control of fixed assets and stock.
    Question

    LO 2 1.5 Goal of Financial Management. What goal


    should always motivate the actions of the firm’s financial
    manager?
    To maximize the current market value (share price)
    of the equity of the firm (whether it’s publicly traded
    or not).
    Question

    LO 4 1.6 Agency Problems. Who owns a corporation?


    Describe the process whereby the owners control the
    firm’s management.
    What is the main reason that an agency relationship
    exists in the corporate form of organization?
    In this context, what kinds of problems can arise?
    • In the corporate form of ownership, the shareholders are the
    owners of the firm. The shareholders elect the directors of the
    corporation, who in turn appoint the firm’s management.
    • This separation of ownership from control in the corporate form
    of organization is what causes agency problems to exist.
    • Management may act in its own or someone else’s best interests,
    rather than those of the shareholders. If such events occur, they
    may contradict the goal of maximizing the share price of the equity
    of the firm.
    Question

    LO 3 1.7 Primary versus Secondary Markets. You’ve probably


    noticed coverage in the financial press of an initial public
    offering (IPO) of a company’s securities.
    Social networking company Facebook/Snapchat is a relatively
    recent example.
    Is an IPO a primary market transaction or a secondary market
    transaction?
    A primary market transaction.
    Question

    LO 3 1.8 Auction versus Dealer Markets. What does it mean


    when we say the New York Stock Exchange is an auction
    market?
    How are auction markets different from dealer markets? What
    kind of market is NASDAQ?
    In auction markets like the NYSE, brokers and agents meet at a
    physical location (the exchange) to buy and sell their assets.
    Dealer markets like NASDAQ represent dealers operating in
    dispersed locales who buy and sell assets themselves, usually
    communicating with other dealers electronically or literally over
    the counter.
    In an auction market, buyers enter competitive bids and sellers
    submit competitive offers at the same time. The price at which
    a stock trades represents the highest price that a buyer is willing to
    pay and the lowest price that a seller is willing to accept.

    An example of a dealer market is the Nasdaq;


    1.in which the dealers, who are known as market makers, provide
    firm bid and ask prices at which they are willing to buy and sell a
    security.
    2 The theory is that competition between dealers will provide the
    best possible price for investors.
    Question

    LO 2 1.9 Not-for-Profit Firm Goals. Suppose you were the financial


    manager of a not-for-profit business (a not-for-profit hospital,
    perhaps).
    What kinds of goals do you think would be appropriate?
    Since such organizations frequently pursue social or political missions,
    many different goals are conceivable.
    • One goal that is often cited is revenue minimization; i.e., providing
    their goods and services to society at the lowest possible cost.
    • Another approach might be to observe that even a not-for-profit
    business has equity. Thus, an appropriate goal would be to maximize
    the value of the equity.
    Question

    LO 2 1.10 Ethics and Firm Goals. Can our goal of maximizing the value
    of the stock conflict with other goals, such as avoiding unethical or
    illegal behavior?
    In particular, do you think subjects such as customer and employee
    safety, the environment, and the general good of society fit in this
    framework, or are they essentially ignored? Try to think of some specific
    scenarios to
    illustrate your answer.
    An argument can be made either way. At one extreme, we
    could argue that in a market economy, all of these things are
    priced. This implies an optimal level of ethical and/or illegal
    behavior and the framework of stock valuation explicitly
    includes these. At the other extreme, we could argue that
    these are non-economic phenomena and are best handled
    through the political process. The following is a classic (and
    highly relevant) thought question that illustrates this debate: “A
    firm has estimated that the cost of improving the safety of one
    of its products is $30 million. However, the firm believes that
    improving the safety of the product will only save $20 million in
    product liability claims. What should the firm do?”
    Question

    LO 2 1.11 International Firm Goal. Would our goal of maximizing


    the value of the stock be different if we were thinking about
    financial management in a foreign country? Why or why not?
    The goal will be the same, but the best course of action toward that goal
    may require adjustments due to different social, political, and economic
    climates.
    Question

    LO 4 1.12 Agency Problems. Suppose you own stock in a company. The current
    price per share is $25. Another company has just announced that it wants to buy
    your company and will pay $35 per share to acquire all the outstanding stock. Your
    company’s management immediately begins fighting off this hostile bid. Is
    management acting in the shareholders’ best interests? Why or why not?
    Question

    1.1 Listing Requirements. This chapter discussed some of the listing requirements for the NYSE and
    NASDAQ. Find the complete listing requirements for the New York Stock Exchange at www.nyse.com and
    NASDAQ at www.nasdaq.com. Which has more stringent listing requirements? Why don’t they have the
    same listing requirements?
    Question

    1.2 Business Formation. As you may (or may not) know, many companies incorporate
    in Delaware for a variety of reasons. Visit BizFilings at www.bizfilings.com to find out
    why. Which state has the highest fee for incorporation? For an LLC? While at the site,
    look at the FAQ section regarding corporations and LLCs.

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