Chapter 01 Introduction to Financial Management PDF

Because learning changes everything. ® Chapter 01 Introduction to Financial Management © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. ...

Because learning changes everything. ® Chapter 01 Introduction to Financial Management © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.  Key Concepts and Skills After studying this chapter, you should be able to: Discuss the basic types of financial management decisions and the role of the financial manager. Identify the goal of financial management. Compare the financial implications of the different forms of business organizations. Describe the conflicts of interest that can arise between managers and owners. © McGraw Hill, LLC 2  Chapter Outline 1.1 Finance: A Quick Look. 1.2 Business Finance and The Financial Manager. 1.3 Forms of Business Organization. 1.4 The Goal of Financial Management. 1.5 The Agency Problem and Control of the Corporation. 1.6 Financial Markets and the Corporation. © McGraw Hill, LLC 3  Basic Areas of Finance 1 1. Corporate finance = Business finance. 2. Investments. 3. Financial institutions. 4. International finance. Return to Quiz © McGraw Hill, LLC 4  Investments Work with financial assets such as stocks and bonds. Value of financial assets, risk versus return, and asset allocation. Job opportunities. Stockbroker or financial advisor. Portfolio manager. Security analyst. © McGraw Hill, LLC 5  Financial Institutions Companies that specialize in financial matters. Banks—commercial and investment, credit unions, savings and loans. Insurance companies. Brokerage firms. Job opportunities. © McGraw Hill, LLC 6  International Finance An area of specialization within each of the areas discussed so far. May allow you to work in other countries or at least travel on a regular basis. Need to be familiar with exchange rates and political risk. Need to understand the customs of other countries; speaking a foreign language fluently is also helpful. © McGraw Hill, LLC 7  Basic Areas of Finance 2 Traditionally, financial topics are grouped into four main areas: 1. Corporate finance. 2. Investments. 3. Financial institutions. 4. International finance. © McGraw Hill, LLC 8  Why Study Finance? Marketing. Budgets, marketing research, marketing financial products. Accounting. Dual accounting and finance function, preparation of financial statements. Management. Strategic thinking, job performance, profitability. Personal finance. Budgeting, retirement planning, college planning, day-to- day cash flow issues. © McGraw Hill, LLC 9  Business Finance Some important questions that are answered using finance: What long-term investments should the firm take on? Where will we get the long-term financing to pay for the investments? How will we manage the everyday financial activities of the firm? © McGraw Hill, LLC 10  Financial Manager Financial managers try to answer some, or all, of these questions. The top financial manager within a firm is usually the Chief Financial Officer (CFO). Treasurer—oversees cash management, credit management, capital expenditures, and financial planning. Controller—oversees taxes, cost accounting, financial accounting, and data processing. © McGraw Hill, LLC 11  Corporate Organization Chart Figure 1.1 A simplified organizational chart The exact titles and organization differ from company to company. Access the text alternative for slide images. © McGraw Hill, LLC 12  Financial Management Decisions Capital budgeting. What long-term investments or projects should the business take on? Capital structure. How should we pay for our assets? Should we use debt or equity? Working capital management. How do we manage the day-to-day finances of the firm? Return to Quick Quiz © McGraw Hill, LLC 13  Forms of Business Organization Three major forms in the United States. Sole proprietorship. Partnership. General. Limited. Corporation. S-Corp. Limited liability company. You can find more information at this link. Return to Quick Quiz © McGraw Hill, LLC 14  Sole Proprietorship Business owned by one person Advantages. Disadvantages. Easiest to start. Limited to life of owner. Least regulated. Equity capital limited to Single owner keeps all of the owner’s personal wealth. profits. Unlimited liability. Taxed once as personal Difficult to sell ownership income. interest. Information about business structures can be found at this link. © McGraw Hill, LLC 15  Partnership Business owned by two or more persons Advantages. Disadvantages. Two or more owners. Unlimited liability. More capital available. General partnership. Relatively easy to start. Limited partnership. Income taxed once as Partnership dissolves when personal income. one partner dies or wishes to sell. Difficult to transfer ownership. Information about business structures can be found at this link. © McGraw Hill, LLC 16  Corporation A legal “person” distinct from owners and a resident of a state Advantages. Disadvantages. Limited liability. Separation of ownership Unlimited life. and management (agency problem). Separation of ownership and management. Double taxation (income taxed at the corporate rate Transfer of ownership is easy. and then dividends taxed at Easier to raise capital. personal rate, while dividends paid are not tax deductible). Information about business structures can be found at this link. © McGraw Hill, LLC 17  International Corporate Forms All of these forms feature public ownership and limited liability Table 1.1 International corporations Company Country of Origin Type of Company Translation Bayerische Motoren Germany Aktiengesellschaft Corporation Werke (BMW) AG Montblanc GmbH Germany Gesellschaft mit Company with limited beschränkter Haftung liability Rolls-Royce PLC United Kingdom Public limited Public limited company company Shell UK Ltd. United Kingdom Limited Corporation Unilever NV Netherlands Naamloze Limited liability Vennootschap company Fiat SpA Italy Società per Azioni Public limited company Saab AB Sweden Aktiebolag Joint stock company Peugeot SA France Société Anonyme Joint stock company More information on publicly traded companies can be found at this link. © McGraw Hill, LLC 18  Goal of Financial Management 1 What should be the goal of a corporation? Maximize profit? Minimize costs? Maximize market share? Maximize the current value per share of the company’s existing stock. Maximize the market value of the existing owners’ equity. Return to Quick Quiz © McGraw Hill, LLC 19  Goal of Financial Management 2 Does this mean we should do anything and everything to maximize owner wealth? Outsourcing? Offshoring? Enron? Corporate support of charities? © McGraw Hill, LLC 20  Sarbanes-Oxley Act (SarBox, 2002) Driven by corporate scandals. Enron, Tyco, WorldCom, Adelphia. Intended to strengthen protection against accounting fraud and financial malpractice. Compliance very costly. Firms driven to: Go public outside the U.S. Go private (“go dark”). More information about the Sarbanes-Oxley Act can be found at this link. © McGraw Hill, LLC 21  The Agency Problem Agency relationship. Principal hires an agent to represent its interests. Stockholders (principals) hire managers (agents) to run the company. Agency problem. Conflict of interest between principal and agent. Management goals and agency costs. Return to Quick Quiz © McGraw Hill, LLC 22  Do Managers Act in the Shareholders’ Interests? Managerial compensation. Incentives can be used to align management and stockholder interests. Incentives need to be carefully structured to ensure that they achieve their goal. Corporate control. Threat of a takeover may result in better management. Other stakeholders. © McGraw Hill, LLC 23  Example: Work the Web The internet provides a wealth of information about individual companies. Finance.yahoo.com is an excellent site. Examples: Southwest Airlines (LUV). Harley-Davidson (HOG). American Express (AXP). © McGraw Hill, LLC 24  Cash Flows Between the Firm and the Financial Markets Figure 1.2 Cash flows between the firm and the financial markets Access the text alternative for slide images. © McGraw Hill, LLC 25  Financial Markets Cash flows to the firm. Primary versus secondary markets. Dealer versus auction markets. Listed versus over-the-counter securities. NYSE. Nasdaq. © McGraw Hill, LLC 26  Quick Quiz What are the four basic areas of finance? (Slide 1.4). What are the three types of financial management decisions, and what questions are they designed to answer? (Slide 1.13). What are the three major forms of business organization? (Slide 1.14). What is the goal of financial management? (Slide 1.19). What are agency problems, and why do they exist within a corporation? (Slide 1.22). © McGraw Hill, LLC 27  Because learning changes everything. ® www.mheducation.com © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.