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Credit Crunch-Decline in Lending Activity by Financial Institutions Brought On by A Sudden

The document summarizes the global financial crisis of 2008, its causes and effects, and implications for financial managers. It then discusses the goals of financial management as maximizing shareholder wealth and firm value rather than just profit. Finally, it outlines the responsibilities of financial managers and concepts in financial management, including agency relationships and control mechanisms.

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seungwan son
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33 views

Credit Crunch-Decline in Lending Activity by Financial Institutions Brought On by A Sudden

The document summarizes the global financial crisis of 2008, its causes and effects, and implications for financial managers. It then discusses the goals of financial management as maximizing shareholder wealth and firm value rather than just profit. Finally, it outlines the responsibilities of financial managers and concepts in financial management, including agency relationships and control mechanisms.

Uploaded by

seungwan son
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Finman

GLOBAL FINANCIAL CRISIS


-year 2008
-US and European banks, insurance and mortgage banks weaken
-Causes: misapplications of r isk controls for bad debts
Collateralization of debt and fraud
Deceleration of economic activities
Credit crunch- decline in lending activity by financial institutions brought on by a sudden
shortage of funds.
- Other nations were also affected
- Effects: Bank failures, decline stock, declines market value of equities and commodities,
- Deleveraging happens when a firm cuts down its financial leverage or debt by raising
capital, or selling off assets and/or making cuts where necessary.
- Liquidity problems, decrease international trade

IMPLICATIONS OF GLOBAL CRISIS TO FINANCIAL MANAGERS


- Financial manager must sustain and maintain the economic capability of an enterprise or
even a nation.
- Competently manage the global financial affairs
- Equipped in finding ways and means on negative outcomes of risk and borrowings foreign
exchange transactions, equity and debt transactions and inflations

GOALS OF FINANCIAL MANAGEMENT


- Yield the highest possible profit
- First drawback: Changes in profit may also mean changes in risk
- 2nd drawback: maximizing profit approach- does not guarantee the timing when
profit/gain would be received.
- 3rd drawback: accurate measuring of the key ingredient the PROFIT

GOALS:
- Maximization of the value of the firm (Valuation Approach)
o main goal of financial management is to maximize not profit alone, but the
maximization of overall value of the firm
o Financial manager considers- risk attached to investment proposal
 Time design how profits flow
 Quality and reliability of profits by firm

- Maximization of Shareholder Wealth


o Expansive goal of the firm
o Focus is to amplify long term wealth of shareholders
o Profit maximization does not mean stock value maximization
o If concerned with shareholders, it should focus of EPS

- Social Responsibility and Ethical Behavior


o Most cases reconciliation and concerted/coordination
o Coordination with government agencies

FUNCTION OF FINANCIAL MANAGEMENT


- Allotment and spreading of company funds
- Create well balanced financing activities
- Formulate suitable dividend policy
- General functions: Cash, inventory, credit, and disbursement management, fund receipt
- Balance income and considering risk (risk-return-trade-off) to achieve main goal of financial
management which is MAXIMIZE SHAREHOLDER’S WEALTH

FINANCIAL MANAGER’S RESPONSIBILITIES

1. Forecasting and Planning


2. Making crucial investment and financing decisions
3. Coordinating and controlling
4. Trading in Financial markets
5. Risk Management

AGENCY RELATIONSHIPS
- Shareholders and managers
- Creditors and owners

AGENCY CONFLICTS
- Conflict of interest

AGENCY COSTS
- Costs spent in assuring managerial actions are for the benefit of shareholder
- Agency costs should not exceed gain from implementing particular measures

CONTROL MECHANISMS
1. Provide Performance- based incentive plans
- Provide managers with executive stock options which means managers can acquire
company’s share at fixed price.
- Performance shares may also give to managers as incentives-based effectiveness and
achieving organization goals

2. Straight Involvement by Shareholders


- Provide suggestions to management in running the business
3. Takeovers
- Shareholders sometimes do hostile takeovers
- Managers of firm acquired by shareholders are terminated

VIDEO
FINANCIAL MANAGEMENT

TERMS
- Business Finance- concerned with planning, raising, controlling, administering of funds
- Finance- study how to make good decisions that involve money
o What assets to buy?
o 2 PILLARS OF FINANCE
 Risk-
 Return
o FUNCTIONS
 Analysis
 Decision Making
o AREAS OF FINANCE
 Corporate Finance
 Personal Finance
 Investments and Portfolio Management
 Financial Markets and Institutions
 Public Finance- Government
o TYPES OF FINANCE
 Public Finance
 Private Finance

CONCEPTS

Fixed Costs-
Cost of Goods Sold
Contribution- money contributed to keep the store open
- Leftover money after paying COGS
Contribution Margin

SCOPE OF FINANCIAL MANAGEMENT


- Financial Planning
- Acquisition of Funds
- Proper use of funds
- Financial Decision
- Improve Profitability- with the help of strong financial control such as budgetary control,
ratio analysis, cost volume profit analysis
- Increase the Value of the firm
- Promoting Savings

SCOPE
-Financial Management and Economics, Accounting, and Mathematics
-Financial Management and Production Management, Marketing, Human Resource

INTERELATION AMONG FINANCIAL DECISION


- They are related since they are after of the same goal which is maximizing shareholder’s
wealth
- No function is superior

NATURE OF FINMAN
- Relationship of economics and accounting
- How much to pay shareholders?
- How much to retain as working capital for the business?

FUNCTION AREAS
-determining financial needs
-choosing the sources of funds
-financial analysis and interpretation
-CVP analysis
-Working Capital Management
-Dividend Policy
-Capital Budgeting

3 MAJOR DECISIONS
1. Investment decision
2. Finance Decision: - Capital Structure Theory
 Capital structure decision

3. Dividend Decision

OBJECTIVES
- Profit Maximization- cashing per share maximization, leads to maximize the business
operation
- Wealth Maximization – advanced with latest innovations and improvements

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