CH 01 PPT 13e

Contemporary Financial
Management, 13th Edition

by
Moyer, McGuigan and Rao
Prepared by William T. Chittenden

Texas State University
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a 1
publicly accessible website, in whole or in part.
Chapter 1
The Role and Objective of
Financial Management
Introduction
 Some Questions Faced by Financial

Managers
 Will a particular investment be successful?
 Where will the funds come from to finance the
investment?
 Does the firm have adequate cash or access to
cash to meet its daily operating needs?
 How much inventory should we hold?
 Is a merger or acquisition advisable?
What is the primary goal of the
firm?
The Goal of Shareholder Wealth
Maximization
 The most widely accepted objective of the
firm is to maximize shareholder wealth
 Shareholder Wealth = Number of shares
outstanding × Market price per share
 Management should seek to maximize the
present value of the expected future returns
to the shareholders of the firm
Maximization
 Stakeholder Concerns
 Stockholders
 Customers
 Employees
 Suppliers
 Communities in which the firm operates
 Divergent Objectives
Maximization
 Agency Problems
 Agency Relationships
 Principals
 Agent
 Stockholders and Creditors
 Stockholders and Managers
 Agency Problems and Costs
Maximization
 Agency Problems
 Corporate Governance
 The board of directors of a corporation should
have a majority of independent directors
 The committee responsible for nominating
members of the board of directors must be
composed only of independent directors
 The post of chairman of the board of directors
should be split from the CEO position
 All members of the audit and compensation
committees must be independent directors
Maximization
 Agency Problems
 Managerial Compensation
 Properly designed compensation contracts can
help to align shareholder–management conflicts
 Stock Options
 Exercise Price
 Restriced Stock
 Performance Shares
 Threat of Takeovers
 Takeovers can serve as an important deterrent to
shareholder-management conflicts
Is maximizing profits the
same as maximizing
shareholder wealth?
Maximization of Shareholder
Wealth: Managerial Strategies
 Profit Maximization
 Maximizing profits is typically not the
same as maximizing shareholder wealth
 Profit maximization lacks a time dimension
(long-term versus short-term)
 GAAP results in hundreds of definitions of
profits (or earnings or income)
 Profit maximization ignores risk
 Book Value versus Market Value
 Determinants of Value
 Cash Flow
 Timing of Cash Flows
 Risk
 Managerial Actions to Influence Value
 Products and services offered for sale
 Production technology
 Marketing and distribution network
 Investment strategies
 Employment policies and compensation
packages for managers and other employees
 Ownership form
 Capital structure
 Working capital management policies
 Dividend policies
Forms of Business Organizations
 Sole proprietorship
 Partnership
 Corporation
 Sole proprietorship
 Owned by one person
 Represent 72 percent of all businesses
 Account for less than 4 percent of total
business revenues
 Advantage
 Easy formation
 Disadvantages
 Unlimited liability
 Difficulty raising funds
 Partnership
 Owned by two or more persons
 About 10 percent of US businesses, 13
percent of business revenues
 Classified as general or limited
 General partners work in the partnership
 Partnership
 Advantages
 Limited partners’ liability is limited to what is
specified in the agreement.
 Disadvantages
 Partnership dissolves when a general partner
dies
 Unlimited liability for general partners
 Corporation
 A “legal person” composed of one or more
actual individuals or legal entities
 About 20 percent of US businesses, 84
percent of business revenues
 Corporation
 Advantages
 Limited Liability
 Permanency
 Flexibility
 Ability to Raise Capital
 Disadvantages
 Ownership is often separated from management
 Corporation
 Corporate Organization and Governance
 Stockholders elect a board of directors
 Board of directors then elect the officers
 Chairman of the board
 Chief executive officer (CEO)
 Chief operating officer (COO)
 President Management
 Chief financial officer (CFO)
 Vice presidents
 Treasurer
 Secretary
 Corporation
 Corporate Securities
 Priority of Corporate Securities
 Debt Securities
 Preferred Stock
 Common Stock
 Other Types of Business Organizations

 Subchapter S Corporation
 Limited Liability Company
 Limited Liability Partnership
Organization of the Financial
Management Function
 Chief Financial Officer
 Oversees:
 Accounting
 Treasury
 Tax
 Audit
Management Function
 Controller
 Oversees:
 Financial Accounting
 Cost Accounting
 Taxes
 Data Processing
Management Function
 Treasurer
 Oversees:
 Cash and Marketable Securities Management
 Capital Budgeting Analysis
 Financial Planning
 Investor Relations
 Pension Fund Management
Management Function
 Financial Management and Other
Disciplines
 Accounting
 Financial managers are primarily concerned with
a firm’s cash flow
Management Function
Disciplines
 Economics
 Microeconomics
 Financial managers use the concepts of setting
marginal cost equal to marginal revenue when making
long-term investment decisions and when managing
working capital
 Macroeconomics
 Financial managers should recognize and understand
how monetary and fiscal policies affect the economy
and the cost of funds and the availability of credit
Management Function
Disciplines
 Marketing, Production, Quantitative
Methods, and Human Resources
Management
 All are indirectly related to the key day-to-day
decisions made by financial managers
Career Opportunities in Finance
 Corporate Finance
 Commercial Banks
 Securities Brokers
 Investment Banks
 Mutual Funds
 Pension Funds
 Real Estate Companies
 Insurance Companies
Professional Finance Affiliations
and Certifications
 Organizations
 Financial Executives Institute
 Institute of Chartered Financial Analysts
 Financial Management Association
 Certifications
 Certified in Financial Management (CFM)
 Certified Financial Planner (CFP)
 Chartered Financial Analyst (CFA)
 Certified Treasury Professional (CTP)
Questions?
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Contemporary Financial

Management, 13th Edition

Prepared by William T. Chittenden

 Some Questions Faced by Financial

 Other Types of Business Organizations

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