Holy Angel University School of Business and Accountancy Financial Management PDF

 I. AN OVERVIEW FINANCIAL MANAGEMENT MATHBUSFIN  Learning Outcomes Explain what finance entails and why everyone should have an understanding of basic financial concepts Identify different forms of business organization as well as the advantages and dis...

 I. AN OVERVIEW FINANCIAL MANAGEMENT MATHBUSFIN  Learning Outcomes Explain what finance entails and why everyone should have an understanding of basic financial concepts Identify different forms of business organization as well as the advantages and disadvantages of each. Identify (1) major goals that firms pursue and (2) what a firm’s primary goal should be. Explain the role that ethics and good governance play in successful businesses. Describe how foreign firms differ from U.S. firms and identify factors that affect financial decisions in multinational firms.  What is Finance? Finance is concerned with decisions about money (Cash Flows) Finance decisions deal with how money is raised and used Everything else being equal: – More value is preferred to less – The sooner cash is received the more value it has – Less risky assets are more valuable than riskier assets  What is Finance? is defined by Webster’s Dictionary as “the system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.” Finance has many facets, which makes it difficult to provide one concise definition.  Jobs in Finances Finance prepares students for jobs in banking, investments, insurance, corporations, and government. Accounting students need to know marketing, management, and human resources; they also need to understand finance, for it affects decisions in all those areas.  General Areas of Finance Financial Markets and Institutions Investments Financial Services Managerial Finance  Financial Markets and Institutions Financial institutions, which include banks, insurance companies, savings and loans, and credit unions, are an integral part of the general financial services market place.  Investments This are of finance focuses on the decisions made by businesses and individuals as they choose securities for their investment portfolios.  Financial Services Financial services refers to functions provided by organizations that deal with the management money.  Managerial (Business) Finance Managerial finance deals with decisions that all firms make concerning their cash flows, including both inflows and out flows.  Alternative Forms of Business Organization Proprietorship Partnership Corporation  Proprietorship Advantages: – Ease of formation – Subject to few government regulations – No corporate income taxes Limitations: – Unlimited personal liability – Limited life – Transferring ownership is difficult – Difficult to raise capital  Partnership Like a proprietorship, except two or more owners A partnership has roughly the same advantages and limitations as a proprietorship  Corporation Advantages: – Unlimited life – Easy transfer of ownership – Limited liability – Ease of raising capital Disadvantages: – Cost of set-up and report filing – Double taxation  Hybrid Forms of Business Limited Liability Partnership (LLP) Limited Liability Company (LLC) S Corporation  Limited Liability Partnership (LLP) In the earlier discussion of a partnership, we described the form of business that is referred to as a general partnership, wherein each partner is personally liable for any of the debts of the business.  Limited Liability Company (LLC) A limited liability company is a relatively new business form that has become popular during the past couple of decades; it combines features of a corporation and partnership.  S Corporation A corporation with no more than 100 stockholders that elects to be taxed in the same way as proprietorships and partnerships, so that business income is only taxed once.  Balancing Shareholder Value and the Interest of Society It focus primarily on publicly owned companies; hence, we operate on the assumption that management’s primary financial goal is shareholder wealth maximization. At the same time, the managers know that this does not mean maximize shareholder value “at all costs.” Managers have an obligation to behave ethically, and they must follow the laws and other society-imposed constraints.  Managerial Actions to Maximize Shareholder Wealth Stockholder wealth maximization. The appropriate goal for management decision; considers the risk and timing associated with expected cash flows to maximize the price of the firm’s common stock.  Should Earnings per Share (EPS) Be Maximized? Will profit maximization also result in stock price maximization? In answering this question, we introduce the concept of earnings per share (EPS), which equals net income (NI) divided by the number of outstanding shares of common stock (shares) – that is, EPS = NI/Shares. Many investors use EPS to gauge the value of a stock. Intrinsic Values, Stock Price, and Executive Compensation  Intrinsic Value An estimate of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated, but not measured precisely.  Stock Price The term stock price refers to the current price that a share of stock is trading for on the market. Every publicly traded company, when its shares are.  Executive Compensation Is composed of the financial compensation and other non- financial benefits received by an executive from their firm for their service to the organization. It is typically a mixture of salary, bonuses, shares of or call options on the company stock, benefits, and perquisites, ideally configured to take into account government regulations, tax law, the desires of the organization and the executive, and rewards for performance.  Importance Business Trends Business trend awareness as a skill refers to one’s ability to be conscious of the changing ways in which businesses are developing. For example, the vitality of online presence for having a business that thrives originated from a mere trend of internet usage. As a result, it is now believed that small businesses having a website tend to have a 40% faster growth that those that don’t have a website. The knowledge of all such trends and the understanding of how they will impact one’s business decisions is what eventually brings success to the individual as well as the company he works for.  Why is business trend awareness important? If your business is not amongst those that can instigate a trend, the least your business can do is to follow such trends. For this reason, people running a business must have business trend awareness skills and be able to reap the following benefits: Enhanced forecasting ability. Helps in determining the required changes for improvement.  Enhanced forecasting ability. If you are able to understand the current trends and predict the future ones surrounding your business, forecasting the future of your business will be a lot easier for you. It will enable you to make better strategic decisions, capitalize on good business opportunities, and overcome the fierce competition that your business might face.  Helps in determining the required changes for improvement. If you know all about the current and future business trends, you can compare with them your current strategies. Anything that does not match must be improved. This way the business trends become a reliable guide for determining the required changes in one’s business or strategies.  Business Ethics Webster: “A standard of conduct and moral behavior.” Business Ethics: A company’s attitude and conduct toward its employees, customers, community, and stockholders.  Business Ethics Reputations reflect the extent to which firms and people are ethical. Ethics is defined in Webster’s Dictionary as “standards of conduct or moral behavior.” Business ethics can be thought of as a company’s attitude and conduct toward its employees, customers, community, and stockholders. A firm’s commitment to business ethics can be measured by the tendency of its employees, from the top down, to adhere to laws, regulations, and moral standards relating to product safety and quality, fair employment practices, fair marketing and selling practices, the use of confidential information for personal gain, community involvement, and the use of illegal payments to obtain business.  Stockholders versus Managers Managers are naturally inclined to act in their own best interests. Mechanisms to motivate managers to act in shareholder’s best interest – Managerial compensation (incentives) – Shareholder intervention – Threat of takeover  Goals of the Corporation Primary goal: stockholder wealth maximization — translates to maximizing stock price. Managerial incentives Social responsibility  Managerial Actions to Maximize Stockholder Wealth Capital Structure Decisions Capital Budgeting Decisions Dividend Policy Decisions  Reference Brigham, E.F. and Houston, J.F. (2016). Fundamentals of Financial Management, 13th. University of Florida: Cengage Learning. Brigham, E.F. and Houston, J.F. (2019). Fundamentals of Financial Management, 15th. University of Florida: Cengage Learning. https://corporatefinanceinstitute.com/resources/knowledge/trading- investing/stock-price/ https://en.wikipedia.org/wiki/Executive_compensation https://www.cleverism.com/skills-and-tools/business-trend-awareness/