View
228
Download
0
Category
Preview:
Citation preview
7/31/2019 Ch 01 Show
1/17
1 - 0
Copyright 2002 by Harcourt, Inc. All rights reserved.
CHAPTER 1An Overview of Financial Management
Role of financial management
Career opportunities
Forms of business organization
Goals of the corporation Issues of the new millenium
Agency relationships
7/31/2019 Ch 01 Show
2/17
1 - 1
Copyright 2002 by Harcourt, Inc. All rights reserved.
What causes a company to have aparticular stock value?
How can managers make choicesthat add value to their companies?
How can managers ensure thattheir companies dont run out ofcash while executing their plans?
What three questions does financial
management seek to answer?
7/31/2019 Ch 01 Show
3/17
1 - 2
Copyright 2002 by Harcourt, Inc. All rights reserved.
Institutions and capital markets
Investments
Financial management
Career Opportunities in Finance
7/31/2019 Ch 01 Show
4/17
1 - 3
Copyright 2002 by Harcourt, Inc. All rights reserved.
Sole proprietorship
Partnership
Corporation
Alternative Forms of
Business Organization
7/31/2019 Ch 01 Show
5/17
1 - 4
Copyright 2002 by Harcourt, Inc. All rights reserved.
Advantages:
Ease of formation
Subject to few regulationsNo corporate income taxes
Disadvantages:
Limited lifeUnlimited liability
Difficult to raise capital
Sole Proprietorship
7/31/2019 Ch 01 Show
6/17
1 - 5
Copyright 2002 by Harcourt, Inc. All rights reserved.
A partnership has roughly the same
advantages and disadvantages as asole proprietorship.
Partnership
7/31/2019 Ch 01 Show
7/17
1 - 6
Copyright 2002 by Harcourt, Inc. All rights reserved.
Advantages:
Unlimited life
Easy transfer of ownershipLimited liability
Ease of raising capital
Disadvantages:Double taxation
Cost of set-up and report filing
Corporation
7/31/2019 Ch 01 Show
8/17
1 - 7
Copyright 2002 by Harcourt, Inc. All rights reserved.
The primary goal is shareholder wealthmaximization, which translates to
maximizing stock price.Should firms behave ethically? YES!
Do firms have any responsibilities to
society at large? YES! Shareholdersare also members of society.
Goals of the Corporation
7/31/2019 Ch 01 Show
9/17
1 - 8
Copyright 2002 by Harcourt, Inc. All rights reserved.
Is maximizing stock price good for
society, employees, and customers?
Employment growth is higher in firmsthat try to maximize stock price. On
average, employment goes up in:firms that make managers into
owners (such as LBO firms)
firms that were owned by thegovernment but that have been soldto private investors
7/31/2019 Ch 01 Show
10/17
1 - 9
Copyright 2002 by Harcourt, Inc. All rights reserved.
Consumer welfare is higher incapitalist free market economiesthan in communist or socialisteconomies.
Fortune lists the most admired firms.In addition to high stock returns,these firms have:
high quality from customers view
employees who like working there
7/31/2019 Ch 01 Show
11/17
1 - 10
Copyright 2002 by Harcourt, Inc. All rights reserved.
Amount of cash flows expected by
shareholders
Timing of the cash flow stream
Risk of the cash flows
Factors that Affect Stock Price
7/31/2019 Ch 01 Show
12/17
1 - 11
Copyright 2002 by Harcourt, Inc. All rights reserved.
Sales
Current level
Short-term growth rate in salesLong-term sustainable growth rate in
sales
Operating expensesCapital expenses
Three Determinants of Cash Flows
7/31/2019 Ch 01 Show
13/17
1 - 12
Copyright 2002 by Harcourt, Inc. All rights reserved.
Factors that Affect the Level and
Risk of Cash FlowsDecisions made by financial
managers:
Investment decisions (productlines, production processes,geographic market, use oftechnology, marketing strategy)
Financing decisions (choice of debtpolicy and dividend policy)
The external environment
7/31/2019 Ch 01 Show
14/17
1 - 13
Copyright 2002 by Harcourt, Inc. All rights reserved.
Use of computers and electronic
transfers of information
The globalization of business
Financial Management
Issues of the New Millenium
7/31/2019 Ch 01 Show
15/17
1 - 14
Copyright 2002 by Harcourt, Inc. All rights reserved.
An agency relationship existswhenever a principal hires an agent
to act on his or her behalf.Within a corporation, agency
relationships exist between:
Shareholders and managersShareholders and creditors
Agency Relationships
7/31/2019 Ch 01 Show
16/17
1 - 15
Copyright 2002 by Harcourt, Inc. All rights reserved.
Managers are naturally inclined to actin their own best interests.
But the following factors affectmanagerial behavior:
Managerial compensation plans
Direct intervention by shareholdersThe threat of firing
The threat of takeover
Shareholders versus Managers
7/31/2019 Ch 01 Show
17/17
1 - 16
Copyright 2002 by Harcourt, Inc. All rights reserved.
Shareholders (through managers)
could take actions to maximizestock price that are detrimental tocreditors.
In the long run, such actions willraise the cost of debt andultimately lower stock price.
Shareholders versus Creditors
Recommended