Module 1 The Goals and Activites of Financial Management PDF

1 The Goals and Activities of Financial Management Block, Hirt, and Danielsen Foundations of Financial Management...

1 The Goals and Activities of Financial Management Block, Hirt, and Danielsen Foundations of Financial Management 18th edition © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill.  Learning Objectives List some of the concepts of the field of finance covers. Recognize that a firm can have many different forms of organization. Describe how the relationship of risk to return is a central focus of finance. Explain the primary goal of financial managers. Recall that financial managers attempt to achieve wealth maximization through daily activities such as credit and inventory management and through longer-term decisions related to raising funds. Explain future and present value and how they relate to the time value of money. © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-2  The Field of Finance Finance fits between economics and accounting Economics provides picture of business environment Consider consumers and producers Accounting provides financial data Income statements, balance sheets, cashflow statements © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-3  The Field of Finance Continued Financial manager needs to know how to understand and interpret financial statements Finance is closely tied to accounting CFO often in charge of financial planning, accounting, and tax systems Finance is forward thinking vs accounting which measures business activity results © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-4  Investments vs. Corporate Finance Investments Investors use investment principles to value stocks and bonds of companies Investors choose which to purchase Portfolio includes securities by multiple companies Corporate finance Principles used to determine which assets the firm should develop or buy © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-5  Investments vs. Corporate Finance Concluded Financial management Term can be used interchangeable with corporate finance Related to various investment topics Include how outside investors evaluate the company © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-6  The Value of Studying Finance  Career opportunities include  Corporate financial officer, banker, stockbroker, financial analysist, portfolio manager, investment banker, financial consultant, & personal financial planner.  CEO reports directly to board of directors  Marketing managers interested in return on investment of marketing initiatives © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-7  Activities of Financial Management Financial managers perform numerous activities Daily activities include monitor cash balances, manage credit decisions, monitor inventory levels, collect and distribute cash. Less routine activities include negotiations with banks for loans, sale of stocks and bonds, establishment of capital budgeting and dividend plans © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-8  Figure 1-1 Functions of the Financial Manager © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-9  Activities of Financial Management Continued Risk-return trade-off determined to maximize the market value Influences operational side (capital vs. labor or Product A vs. Product B) Influences financial mix (stock vs. bonds vs. retained earnings) © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-10  Forms of Organization Forms of organization include sole proprietorship, partners, and corporation Number of people in organization Liability of owners Complexity of state and federal regulations © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-11  Forms of Organization Continued 1 Sole Proprietorship Represents single-person ownership Advantages Simplicity of decision making Low organizational and operational costs Drawback Unlimited liability to owner Profits and losses taxed as though they belong to individual owner © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-12  Forms of Organization Continued 2 Partnership Similar to sole proprietorship except with two or more owners Articles of partnership specify: Ownership interest Methods for distributing profits Means of withdrawing from the partnership Carries unlimited liability for the owners © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-13  Forms of Organization Continued 3 Partnership (cont’d) Limited liability partnership One or more partners designated general partners and have unlimited liability for debts of firm Other partners designated limited partners and liable only for initial contribution Not all financial institutions extend funds to limited partnership firms © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-14  Forms of Organization Continued 4 Corporation Unique; legal entity unto itself May sue or be sued, engage in contracts, and acquire property Formed through articles of incorporation, which specify rights and limitations of entity Owned by shareholders who enjoy limited liability Has continual life Key feature—easy divisibility of ownership interest by issuing shares of stock © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-15  Forms of Organization Concluded Corporation (cont’d) Disadvantage Potential of double taxation of earnings 2017 Tax Cuts and Jobs Act cut U.S. corporate tax rate from 35% to 21% S corporation Income taxed as direct income to stockholders, thus taxed only once as normal income Limited liability company (LLC) Provides limited liability for the owners Can be taxed as sole proprietorship, partnership, corporation, or S corporation, depending upon elections made by owners © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-16  Corporate Governance Sarbanes-Oxley Act of 2002 Response to scandals and audit failures Created legally binding standards for public companies Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 First major financial regulatory change since great Depression Goal to reduce systemic risks that undermine financial system in U.S. © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-17  Corporate Governance Concluded Agency theory Examines relationship and potential conflict between owners and managers of firm Management operates vs owners focused on shareholders Institutional investors Have more to say about how publicly owned companies are managed Able to vote large blocks of shares for election of board of directors © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-18  The Time Value of Money Time Value of Money (TVM) Is the idea that a dollar received today is worth more than a dollar that we expect to receive in the future Future value of a dollar is greater than a dollar Present value is today’s dollar value FV = PV(1 + i)n FV = Future value PV = Present value i = Interest rate n = Number of periods © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-19  Present Value The future value equation can be reorganized as a present value equation: 1 PV = FV (1 + 𝑖)𝑛 PV = Present value FV = Future value i = Interest rate n = Number of periods © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-20  Goals of Financial Management Primary goal—maximization of profit Drawbacks Change in profit may also represent change in risk Fails to consider timing of benefits Impossible task of accurately measuring key variable “profit” Problems with inflation and international currency transactions further complicate the issue © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-21  A Valuation Approach Ultimate measure of performance – how earnings are valued by investor Time value of money concept is key Businesses are valued in the present Most cash flows are not realized for many years Shareholders are interested in future earnings Investors want longer-term perspectives © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-22  Maximizing Shareholder Wealth Shareholder wealth maximization is the broad goal of the firm Achieved through high value for the firm Residual claim – value of their claims is not fixed Financial manager cannot directly control firm’s stock price Can act in consistent way with shareholder desires Long-term wealth is more important that daily value © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-23  Management and Stockholder Wealth Only way to retain power in long run is by becoming sensitive to shareholder concerns Management maintains long run perspective Board of Directors align management’s incentives and those of shareholders Institutional investors often control enough shares in large companies that they are able to influence the board to unseat managers who are not responsive to shareholders’ interests © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-24  Social Responsibility and Ethical Behavior Adopting policies that maximize values in market Attract capital Provide employment Offer benefits to society Socially desirable action like pollution control, equitable hiring practices, and fair pricing standards may be inconsistent with achieving maximum valuation in the market. © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-25  Social Responsibility and Ethical Behavior Continued Insider trading Using information not available to public, making undue profit from trading in company’s publicly traded securities Unethical and illegal practice protected against by Securities Exchange Commission (SEC) Has a negative impact on shareholder’s interest Ethical behavior creates invaluable reputation © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-26  Role of the Financial Markets Financial markets—meeting place for people, corporations, and institutions Have either a need to lend, borrow, or invest money Participants can be national, state, and local governments Their markets are public financial markets Corporate participants raise funds in corporate financial markets © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-27  Structure and Functions of the Financial Markets Distinct parts of financial markets Domestic and international markets Corporate and government markets Money and capital markets © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-28  Structure and Functions of the Financial Markets Continued Money markets Deal with short-term securities with life of one year or less Securities include Commercial paper sold by corporations to finance daily operations Certificates of deposit with maturities of less than one year sold by banks © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-29  Structure and Functions of the Financial Markets Concluded Capital markets Deal with securities that have life of more than one year Long-term markets Defined as either 1 to 10 years (intermediate markets) or greater than 10 years (long-term markets) Securities include Common stock Preferred stock Corporate and government bonds © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-30  Allocation of Capital Primary market When corporation uses financial markets to raise new funds, sale of securities made through new issue is called initial public offering (IPO) Secondary market Securities bought/sold amongst investors Prices of securities keep changing continually Financial managers given feedback about firms’ performance © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-31  Allocation of Capital Continued Return maximization and risk minimization Investors can choose risk level that meets objective, maximizes return for given risk level Companies rewarded with high-priced securities can raise new funds in money and capital markets at lower cost than competitors Firms pay penalty for failing to perform competitively © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-32  Internationalization of Financial Markets Allocation of capital and search for lower-cost sources of financing in global market Impact of international affairs and technology has resulted in need for managers to understand International capital flows Computerized electronic funds transfer systems Foreign currency hedging strategies © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-33  Format of The Text 1. Introduction 2. Financial Analysis and Planning 3. Working Capital Management 4. The Capital Budgeting Process 5. Long-Term Financing 6. Expanding the Perspective of Corporate Finance © 2023 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw Hill. 1-34