1-1
Conclusions and Review
of Financial
Management
1-2
Types of Finance
?Business
Finance
?Macro Finance
?Micro Finance
?Personal Finance
? Government Finance
1-3
Finance
corporate finance
financial market
international finance
investment
financial engineering
1-4
Functions of Finance
?Financing
?Investing
1-5
Functions of Finance
?Financing
- Where to get funds
- When to get funds
- How much to raise
- How much to pay for funds
?Investing
- What to do with funds once raised
1-6
Forms of Business Organization
?Sole Proprietorship
?Partnership
?Corporation
1-7
Sole Proprietorship
?Advantages
?Ease of formation
?Subject to few regulations
?No corporate income taxes
?Disadvantages
?Limited life
?Difficult to raise capital
Unlimited liability
1-8
Partnership
?Advantages
?Possible synergy
?Subject to few regulations
?No corporate income taxes
?Disadvantages
?Limited life
?Difficult to raise capital
Possible conflicts
1-9
Corporation
?Advantages
?Unlimited life
?Ease of transferring ownership
?Limited liability
?Disadvantages
?Double taxation
?Cost of organization
Cost of report filing
1-10
The Role of Financial
Management
? What is Financial
Management?
? The Goal of the Firm
? Organization of the Financial
Management Function
1-11
What is Financial
Management?
Concerns the acquisition,
financing,and
management of assets
with some overall goal in
mind.
1-12
Investment Decisions
? What is the optimal firm size?
? What specific assets should be
acquired?
? What assets (if any) should be
reduced or eliminated?
Most important of the three
decisions.
1-13
Financing Decisions
?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?
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).
1-14
Asset Management
Decisions
?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.
1-15
What is the Goal
of the Firm?
Maximization of
Shareholder Wealth!
Value creation occurs when
we maximize the share price
for current shareholders.
1-16
Shortcomings of
Alternative Perspectives
? Could increase current profits while
harming firm (e.g.,defer maintenance,
issue common stock to buy T-bills,etc.).
? Ignores risk.
Profit Maximization
?Maximizing a firm’s earnings after taxes.
Problems
1-17
Shortcomings of
Alternative Perspectives
? Does not specify timing or duration of
expected returns.
? Ignores risk.
? Calls for a zero payout dividend policy.
Earnings per Share Maximization
?Maximizing earnings after taxes divided
by shares outstanding.
Problems
1-18
Strengths of Shareholder
Wealth Maximization
?Takes account of,current and future
profits and EPS; the timing,
duration,and risk of profits and EPS;
dividend policy; and all other
relevant factors.
?Thus,share price serves as a
barometer for business performance.
1-19
The Modern Corporation
There exists a SEPARATION
between owners and managers.
Modern Corporation
Shareholders Management
1-20
Role of Management
? An agent is an individual
authorized by another person,
called the principal,to act in
the latter’s behalf.
Management acts as an agent
for the owners (shareholders)
of the firm.
1-21
Agency Theory
?Agency Theory is a branch of
economics relating to the
behavior of principals and their
agents.
?Jensen and Meckling developed
a theory of the firm based on
agency theory.
1-22
Agency Theory
?Incentives include,stock options,
perquisites,and bonuses.
?Principals must provide incentives
so that management acts in the
principals’ best interests and then
monitor results.
1-23
Social Responsibility
?Wealth maximization does not
preclude the firm from being socially
responsible.
?Assume we view the firm as producing
both private and social goods,
?Then shareholder wealth maximization
remains the appropriate goal in
governing the firm.
1-24
Organization of the Financial
Management Function
Board of Directors
President
(Chief Executive Officer)
Vice President
Operations
Vice President
Marketing
VP of
Finance
1-25
Treasurer
Capital Budgeting
Cash Management
Credit Management
Dividend Disbursement
Fin Analysis/Planning
Pension Management
Insurance/Risk Mngmt
Tax Analysis/Planning
Organization of the Financial
Management Function
VP of Finance
Controller
Cost Accounting
Cost Management
Data Processing
General Ledger
Government Reporting
Internal Control
Preparing Fin Stmts
Preparing Budgets
Preparing Forecasts