Presentation on theme: "1-1 UNDERSTANDING WEALTH AND BUSINESS An Overview of Financial Management A Basic Finance Presentation Lourdes College June 2011."— Presentation transcript:
1 1-1 UNDERSTANDING WEALTH AND BUSINESS An Overview of Financial Management A Basic Finance Presentation Lourdes College June 2011
2 1-2 Learning Objectives 1.Understand what financial management is all about; 2.Learn how business enterprises are organized; 3.Know the role of financial management in the growth of a company’s wealth.
3 1-3 1.3 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 and profitability Personal finance – Budgeting, retirement planning, college planning, day-to-day cash flow issues
4 1-4 1.4 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 investment? – How will we manage the everyday financial activities of the firm?
5 1-5 1.5 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
6 1-6 What is Financial Management Financial – money, funds, capital Management – administration, control and skillful managing Financial Management is the skillful managing of funds
7 1-7 3 Areas of Finance Personal Finance Corporate Finance Public Finance
8 1-8 3 Areas of Finance Money and capital markets Securities market & financial institutions Investments Investment decisions Financial management Involves decisions with firms
9 1-9 1.9 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?
10 1-10 1.10 Forms of Organization Three major forms in the United States – Sole proprietorship – Partnership General Limited – Corporation S-Corp Limited liability company
11 1-11 1.11 Sole Proprietorship Advantages – Easiest to start – Least regulated – Single owner keeps all the profits – Taxed once as personal income Disadvantages – Limited to life of owner – Equity capital limited to owner’s personal wealth – Unlimited liability – Difficult to sell ownership interest
12 1-12 1.12 Partnership Advantages – Two or more owners – More capital available – Relatively easy to start – Income taxed once as personal income Disadvantages – Unlimited liability General partnership Limited partnership – Partnership dissolves when one partner dies or wishes to sell – Difficult to transfer ownership
13 1-13 1.13 Corporation Advantages – Limited liability – Unlimited life – Separation of ownership and management – Transfer of ownership is easy – Easier to raise capital Disadvantages – Separation of ownership and management – Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)
14 1-14 1.14 Goal Of Financial Management What should be the goal of a corporation? – Maximize profit? – Minimize costs? – Maximize market share? – Maximize the current value of the company’s stock? Does this mean we should do anything and everything to maximize owner wealth?
15 1-15 1.15 The Agency Problem Agency relationship – Principal hires an agent to represent their interest – Stockholders (principals) hire managers (agents) to run the company Agency problem – Conflict of interest between principal and agent Management goals and agency costs
16 1-16 1.16 Managing Managers Managerial compensation – Incentives can be used to align management and stockholder interests – The incentives need to be structured carefully to make sure that they achieve their goal Corporate control – The threat of a takeover may result in better management Other stakeholders
17 1-17 1.17 Work the Web Example The Internet provides a wealth of information about individual companies One excellent site is finance.yahoo.com Click on the web surfer to go to the site, choose a company and see what information you can find!
18 1-18 1.18 Figure 1.2
19 1-19 1.19 Financial Markets Cash flows to the firm Primary vs. secondary markets – Dealer vs. auction markets – Listed vs. over the counter securities NYSE NASDAQ
20 1-20 Copyright 2004 McGraw- Hill Australia Pty Ltd PPTs t/a Fundamentals of Corporate Finance 3e Ross, Thompson, Christensen, Westerfield and Jordan Slides prepared by Sue Wright 1-20 Financial Markets Financial markets bring together the buyers and sellers of debt and equity securities. Money markets involve the trading of short-term debt securities. Capital markets involve the trading of long-term debt securities. Primary markets involve the original sale of securities. Secondary markets involve the continual buying and selling of issued securities.
21 1-21 Copyright 2004 McGraw-Hill Australia Pty Ltd PPTs t/a Fundamentals of Corporate Finance 3e Ross, Thompson, Christensen, Westerfield and Jordan Slides prepared by Sue Wright 1-21 Structure of Financial Markets
22 1-22 Quick Quiz What are the four basic areas of finance? What are the three types of financial management decisions and what questions are they designed to answer? What are the three major forms of business organization? What is the goal of financial management? What are agency problems and why do they exist within a corporation?
23 1-23 Financial Management Issues of the New Millennium The globalization of business Factors – Improvements in transportation & communication cost – Increasing political clout of consumers – Increase in cost of developing new products – Ability to shift production to wherever cost are lowest
24 1-24 Percentage of Revenue and Net Income from Overseas Operations for 10 Well-Known Corporations, 2001 Company% of Revenue from overseas % of Net Income from overseas Coca-Cola60.835.9 Exxon Mobil69.460.2 General Electric32.625.2 General Motors26.160.6 IBM57.948.4 JP Morgan Chase & Co.35.551.7 McDonald’s63.161.7 Merck18.358.1 3M52.947.0 Sears, Roebuck10.57.8
25 1-25 Financial Management Issues of the New Millennium The effect of changing technology Linking of networks of PCs Immediate access to shared information Face-to-face meeting thru video teleconferencing
26 1-26 Financial Goals of the Corporation The primary financial goal is shareholder wealth maximization, which translates to maximizing stock price. – Do firms have any responsibilities to society at large? – Is stock price maximization good or bad for society? – Should firms behave ethically?
27 1-27 Agency relationships An agency relationship exists whenever a principal hires an agent to act on their behalf. Within a corporation, agency relationships exist between: – Stockholders and managers – Stockholders and creditors
28 1-28 Stockholders versus Managers Managers are naturally inclined to act in their own best interests. But the following factors affect managerial behavior: – Managerial compensation plans – Direct intervention by shareholders – The threat of firing – The threat of takeover
29 1-29 Stockholders versus Creditors Stockholders (through managers) could take actions to maximize stock price that are detrimental to creditors. In the long run, such actions will raise the cost of debt and ultimately lower stock price.
30 1-30 Factors that affect stock price Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows
31 1-31 Factors that Affect the Level and Riskiness of Cash Flows Decisions made by financial managers: – Investment decisions – Financing decisions (the relative use of debt financing) – Dividend policy decisions The external environment
32 1-32 The long and short of it…. Business is wealth creation and sound and prudent financial management is critical to ensuring business success and continuity. Thank you all!
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