Overview of Financial Management 9.03.15 Am
Overview of Financial Management 9.03.15 Am
Learning
Outcomes
LO.1 Explain what finance
entails and why everyone
should understand basic
financial concepts.
Learning
Outcomes
LO.3 Identify major goal(s) that
firms pursue and what a
firm’s primary goal should be.
a. Owner of the
company
b. Manager/Treasurer of
the company
c. Investor
d. Creditor
e. Employee
f. You (student)
LO.1 Explain what finance entails and why
everyone should understand basic financial concepts.
c. Effective utilization of
funds towards achieving
the firm’s goal
c. Effective utilization of
funds towards achieving
the firm’s goal
a. To raise capital.
c. To manage the
resources of the firm
towards achieving the goal
of the company.
a. To raise capital.
c. To manage the
resources of the firm
towards achieving the goal
of the company.
Financial
management
applies the
basic
principles of
General
Management.
Function of
Financial
Management
Financial
management
applies the
basic
principles of
General
Management.
What is the goal of the company?
b. To increase the
resources of the firm.
c. To expand the
distribution of the
product.
b. To increase the
resources of the firm.
c. To expand the
distribution of the
product.
• Financial Planning
• Financial Control
• Are assets being used
efficiently?
• Are the businesses
assets secure?
• Do management act
in the best interest of
shareholders and in
accordance with
business rules?
• Financial Decision Making
3
0
Areas of Financial
Management • Financial
Markets and
Institutions
1 2
• Investments
• Financial
Services
• Managerial
Finance
3 4
31
Financial Markets and Institutions
Financial
Markets
35
Financial Service Providers
The major functions in the investments area are
(a) determining the values, risks, and returns associated with such
financial assets as stocks and bonds and
(b) determining the optimal mix of securities that should be held in
a portfolio of investments, such as a retirement fund.
INVESTMENT
37
Investments
Managerial finance deals
with decisions that all firms
make concerning their cash
flows, including both inflows
and outflows.
o making decisions about
plant expansions to
choosing what types of
securities should be
issued to finance such
expansions.
o deciding the credit terms
under which customers
can buy,
o how much inventory the
firm should carry,
o how much cash to keep
on hand, whether to
acquire other firms
(merger analysis), and
Financial
1. Buying shares of stocks. Markets
Managerial
5. Decision about dividend policy. Finance
Financial
8. Consultation about business acquisitions and Services
merger.
Relating Finance with Non-
Finance Areas
• Management - personnel decisions and
employee relations, strategic planning, and the
general operations of the firm.
• Marketing—the four Ps of marketing—product,
price, place, and promotion—determine the
success of products that are manufactured and
sold by companies.
• Accounting- financial managers rely heavily on
accounting information because making decisions
about the future requires information that
accountants provide about the past.
• Information systems—To make sound decisions,
financial managers rely on accurate information
that is available when needed.
• Economics- focuses on public policy, while the
focus of finance is more company- or industry- 41
specific.
GROUP TASK
50
HYBRID FORMS
OF BUSINESS
• Primary goal:
stockholder
wealth
maximization,
which is the same
as maximizing the
stock price.
• Managerial
incentives
• Corporate Social
responsibility
• Environmental,
Goals of the Social, and
corporate
Corporation governance
52
Business Organized as a
Corporation: Value
Maximized
5
3
Value of the Firm
54
Factors Influenced by Managers that Affect Stock Price
• Projected cash flows
• Timing of cash flow streams
• Risk of projected cash flows (earnings)
• Use of debt (capital structure)
• Dividend policy 55
56
CORPORATE
ORGANIZATIO
N STRUCTURE
• An agency relationship exists whenever a
principal (an owner) hires an agent
(management) to act on his or her behalf.
Agency • An agency problem results when the agent
Relationships (management) makes decisions that are
not in the best interests of principals
(owners).
5
7
Agency What are the possible
Relationships conflict between the
manager and the
stockholders/owners?
5
8
59
AGENCY PROBLEMS
60
Resolving
Agency Conflict
• Managers are naturally inclined
to act in their own best
interests.
• Mechanisms to motivate
managers to act in
shareholder’s best interest
• Managerial compensation
(incentives)
• Shareholder intervention
• Threat of takeover
6
1
Scenario # 1
68
Multinationa
l
Corporations
• Five reasons firms
“go international”:
• To seek new
markets
• To seek raw
materials
• To seek new
technology
• To seek
production
efficiency
• To avoid political
and regulatory
hurdles
Factors Distinguishing
Domestic Firms from
Multinational Firms
• Different currency
denominations
• Economic and legal
ramifications
• Language differences
• Cultural differences
• Roles of governments
• Political risk
70
Ten principles that
form the foundations
of financial
management
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website for classroom use.
71
Principle 1 The Risk–
Return Trade-Off
—We Won’t Take
On Additional
Risk Unless We
Expect to Be
Compensated
with Additional
Return at some
point when we
have all saved
some money.
Ten principles that form the
foundations of financial
management
© 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a
password-protected website for classroom use.
72
Principle 2 The Time
Value of Money—A
Dollar Received
Today Is Worth More
Than a Dollar
Received in the
Future
Principle 3 Cash—Not the Profit—Is King
Principle 4
Incremental
Cash Flows