Contemporary Financial Management 8th Edition

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1 Contemporary Financial Management 8th Edition by Moyer,, McGuigan, and Kretlow Prepared by Tom Peacock University of Houston 2001 South-Western College Publishing

2 Chapter 1 The Role and Objective of Financial Management

3 Questions Faced in Finance How is finance related to other fields of study? What are the goals and objectives of financial managers? How has the finance field evolved? How is the finance field changing today? ٣

4 Principal Forms of Business Organizations Sole proprietorship Partnership Corporation ٤

5 Sole Proprietorship Owned by one person Easy formation advantage Unlimited liability disadvantage Difficulty raising funds disadvantage Represent 75% of all businesses Account for < 6% of the $ volume ٥

6 Partnership Owned by two or more persons Classified as general or limited Partnership dissolves when a general partner dies ٦

7 Liability of Partners General Partner Has unlimited liability for all obligations of the business Limited Partner Liability limited to the partnership agreement ٧

8 Corporation Limited liability Permanency Flexibility Ability to raise of capital Legal entity Have a board of directors Owners are stockholders Easy marketability of shares of ownership ٨

9 Stockholders elect a board of directors Board of directors then hire management ( officers ) ٩

10 Who Manages? Board of directors deals with broad policy Management makes most of the decisions ١٠

11 Stockholder Rights Dividend Voting Asset Preemptive Corporate Securities in Order or Priority Bonds ( highest) Preferred stock Common stock ( C/S ) ( lowest ) ١١

12 Optimal Form of Organization Influenced by Cost Complexity Liability Continuity Raising capital Decision making Tax considerations ١٢

13 Objective of Financial Management ( FM ) Objective of the financial manager Shareholder Wealth Maximization (SWM) NOT profit maximization Does not consider time value of money ١٣

14 SWM Considers the timing and risk of the benefits from stock ownership Determines that a good decision increases the price of the firm's common stock (c/s) Is an impersonal objective Is concerned for social responsibility ١٤

15 Social Responsibility Ethical issues will constantly confront financial managers as they achieve the goal of the firm ( SWM ). Managers Must Avoid personal conflicts Maintain confidentiality Be objective Act fairly ١٥

16 Agency Relationships / Problems Problem created by separation of Management may maximize its own welfare instead of the owners wealth Job security Owners (shareholders) Management and Employees ١٦

17 Job Security Management decisions based on retaining management rather than SWM Example A A decision to retain suppliers rather than selecting new suppliers providing higher quality or lower cost Why If the transition is mishandled management will be scrutinized but if no change is made the issue will be ignored ١٧

18 Agency Costs Management incentives Monitor performance Owners protection Complex organization structures Recent Trends To flatten organization structures to cut costs ١٨

19 Problem created by separation of Owners Management A similar problem Owners Creditors Protective covenants in loan agreements ١٩

20 Examples of Protective Covenants Limitations of Common stock dividends Limitations on additional debts Not entering into sale and lease back arrangements ٢٠

21 Shareholder Wealth Maximizing Is a Market Concept and Results in Maximizing PV of E(R) Measured by Market Value of C/S ٢١

22 3 Basic Factors Determine C/S Market Value 1) Amount of 2) Timing of 3) Risk of Expected cash flows ٢٢

23 Conditions Affecting Market Value Economic environment factors Decisions under management control Conditions in financial markets Expected cash flows ٢٣

24 Competitive Forces Influencing C/S Market Value New entrants Substitute products Bargaining power of buyers Bargaining power of suppliers Rivalry among current competitors ٢٤

25 Cash Flow Concept Used for Financial analysis Planning Resource allocation CF does not equal accounting profit Internal sources Cash External sources ٢٥

26 NPV of an Investment NPV = PV of future cash flows minus cash outlays The NPV of an investment represents the contributions of that investment to the value of the firm and passes on to SWM ٢٦

27 Different Size Businesses Small Business Vs. Large Corporations Fundamental concepts are the same ٢٧

28 Small Business Not the dominant firm in the industry Tend to grow more rapidly Limited access to financial market Lack management resources Have a high failure rate Stock is not publicly traded Poorly diversified Owner/manager frequently the same ٢٨

29 Controller s s Activities Financial accounting Cost accounting Taxes Data processing ٢٩

30 Treasurer s s Activities Management of cash and marketable securities Capital budgeting Financial planning Credit analysis Investors relations Pension fund management ٣٠

31 Disciplines used in Finance Finance Economics Accounting Marketing Production Human Resources Quantitative Analysis ٣١

32 Professional Organizations Financial Executive Institute Institute of Charted Financial Analysis Financial Management Association Institute of Management Accounting ٣٢

33 Exciting Career Opportunities in Finance VP of Finance Director Investor Relations Assistant Treasurer Tax Manager Financial Analyst Account Executive Security Broker Mortgage Analyst Banking ٣٣

CORPORATE FINANCIAL MANAGEMENT. PART I INTRODUCTION (chapter 1-2)

CORPORATE FINANCIAL MANAGEMENT PART I INTRODUCTION (chapter 1-2) Course objectives to enable you to develop the analytical, interpretive, and judgmental abilities required of a financial manager to provide