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The Role and Objective of Financial Management

The document outlines the key topics covered in Chapter 1 on the role and objective of financial management, including common financial decisions faced by managers, the primary goal of maximizing shareholder wealth, agency problems that can arise, different forms of business organizations, the organization of financial management functions within a company, and career opportunities in finance. It also discusses how financial management relates to other business disciplines like accounting and economics.

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46 views34 pages

The Role and Objective of Financial Management

The document outlines the key topics covered in Chapter 1 on the role and objective of financial management, including common financial decisions faced by managers, the primary goal of maximizing shareholder wealth, agency problems that can arise, different forms of business organizations, the organization of financial management functions within a company, and career opportunities in finance. It also discusses how financial management relates to other business disciplines like accounting and economics.

Uploaded by

Milly
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 34

Chapter 1

The Role and Objective of


Financial Management
Outline:
1. Common financial decisions
2. Goal of financial management and agency problems
3. Determinants of firm value
4. Forms of business organizations
5. Organization of financial management functions
6. Career opportunities in finance

Introduction

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
Is

much inventory should we hold?

a merger or acquisition advisable?

etc.

Introduction

Areas of finance

Corporate finance

Financial institutions

Investments

International finance

Public finance

Personal finance

What is the primary goal of the firm?

Maximizing Shareholder Wealth as a


Primary Goal

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

Maximizing Shareholder
Wealth as a Primary Goal

Stakeholders and their Concerns


Stockholders
Customers
Employees
Suppliers
Communities

in which the firm operates

Doing

a good job to satisfy different stakeholders helps


maximize shareholder wealth? Why? Why not? How?

Divergent Objectives: in the interests of managers, not


shareholders.
6

Maximizing Shareholder
Wealth as a Primary Goal

Agency Problems
Agency

Relationships

Principals
Agent
Stockholders

and Creditors

Stockholders

and Managers

Agency

Problems and Costs

Maximizing Shareholder
Wealth as a Primary Goal

Can agency problems be eliminated?

Why? Why not?

Can agency problems be alleviated?

How?

Maximizing Shareholder
Wealth as a Primary Goal

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
9

Maximizing Shareholder
Wealth as a Primary Goal

Agency Problems

Managerial Compensation
Properly

designed compensation contracts can help to align


shareholdermanagement conflicts
Stock

Options

Exercise

Price > current price. Why?

Exercise

period = over some future years. Why?

Restricted

Stock: prevents focus on short-term performance

Performance

Shares

Threat of Takeovers
Takeovers

can serve as an important deterrent to shareholdermanagement conflicts as share prices are depressed or idle cash is
abundant.
10

Is maximizing profits the same as


maximizing shareholder wealth?

11

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

12

Maximization of
Shareholder Wealth:
Managerial Strategies

Determinants of Value
Cash

Flow:

Accounting
Book

Timing

vs. Finance

vs. Market value

of Cash Flows

Risk

13

Maximization of
Shareholder Wealth:
Managerial Strategies

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

14

15

Forms of Business Organizations

Sole proprietorship

Partnership

Corporation

16

Forms of Business Organizations

Sole proprietorship
Owned

by one person

Represent

75 percent of all businesses

Account

for less than 6 percent of total business


revenues

Advantage
Easy

formation

Disadvantages
Unlimited

liability

Difficulty

raising funds

17

Forms of Business Organizations

Partnerships
Owned

by two or more persons

About

7 percent of US businesses, 5 percent of


business revenues

Classified
General

as general or limited

partners work in the partnership

18

Forms of Business Organizations

Partnerships
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

19

Forms of Business Organizations

Corporation
Advantages
Limited

Liability

Permanency
Flexibility
Ability

to Raise Capital

Disadvantages
Ownership

is often separated from management

20

Forms of Business Organizations

Corporation

Corporate Organization and Governance


Stockholders
Board

elect a board of directors

of directors then elect the officers

Chairman

of the board

Chief

executive officer (CEO)

Chief

operating officer (COO)

President
Chief
Vice

financial officer (CFO)

presidents

Treasurer
Secretary

21

Forms of Business Organizations

Corporation
Corporate
Priority

Securities
of Corporate Securities

Debt

Securities

Preferred
Common

Stock

Stock

22

Forms of Business Organizations

Other Types of Business Organizations


Subchapter

S Corporation

Limited

Liability Company

Limited

Liability Partnership

23

Organization of the Financial


Management Function

Chief Financial Officer


Oversees:
Accounting
Treasury
Tax
Audit

24

Organization of the Financial


Management Function

Controller
Oversees:
Financial
Cost

Accounting

Accounting

Taxes
Data

Processing

25

Organization of the Financial


Management Function

Treasurer
Oversees:
Cash

and Marketable Securities Management

Capital

Budgeting Analysis

Financial

Planning

Investor

Relations

Pension

Fund Management

26

27

Organization of the Financial


Management Function

Financial Management and Other Disciplines


Accounting
Financial

managers are primarily concerned


with a firms cash flow

28

Organization of the Financial


Management Function

Financial Management and Other 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
29

Organization of the Financial


Management Function

Financial Management and Other Disciplines


Marketing,

Production, Quantitative Methods, and


Human Resources Management
All

are indirectly related to the key day-to-day


decisions made by financial managers

30

31

Career Opportunities in Finance

Corporate Finance

Commercial Banks

Securities Brokers

Investment Banks

Mutual Funds

Pension Funds

Real Estate Companies

Insurance Companies

32

Professional Finance Affiliations


and Certifications

Organizations
Financial

Executives Institute

Institute

of Chartered Financial Analysts

Financial

Management Association

Certifications
Chartered

Financial Analyst (CFA)

Certified

Financial Manager (CFM)

Certified

Financial Planner (CFP)

Certified

Treasury Professional (CTP)


33

Questions?

34

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