Contemporary Financial Management, 14th Edition by Moyer, McGuigan, and Rao © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter 1 The Role and Objective of Financial Management © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Introduction Some 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 much inventory should be held? Is a merger or an acquisition advisable? © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. What is the primary goal of the firm? © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Goal of Shareholder Wealth Maximization (slide 1 of 5) 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 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Goal of Shareholder Wealth Maximization (slide 2 of 5) Stakeholder Concerns Stockholders Customers Employees Suppliers Communities in which the firm operates Divergent Objectives Divergence between shareholder wealth maximization goal and actual goals of management © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Goal of Shareholder Wealth Maximization (slide 3 of 5) Agency Problems Agency Relationships Principals Agent Stockholders and Creditors Stockholders and Managers Agency Problems and Costs © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Goal of Shareholder Wealth Maximization (slide 4 of 5) 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 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Goal of Shareholder Wealth Maximization (slide 5 of 5) Agency Problems Managerial Compensation Properly designed compensation contracts can help to align shareholder–management conflicts Stock Options Exercise Price Restricted Stock Performance Shares Threat of Takeovers Takeovers can serve as an important deterrent to shareholder–management conflicts © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Is maximizing profits the same as maximizing shareholder wealth? © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Maximization of Shareholder Wealth: Managerial Strategies (slide 1 of 4) Profit Maximization Maximizing profits is typically not the same as maximizing shareholder wealth Profit maximization lacks a time dimension (longterm versus short-term) Generally accepted accounting principles result in hundreds of definitions of profits (or earnings or income) Profit maximization ignores risk © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Maximization of Shareholder Wealth: Managerial Strategies (slide 2 of 4) Book Value versus Market Value Book value reflects historic cost of assets, not earning capacity Book value does not consider risk Determinants of Value Cash Flow Timing of Cash Flows Risk © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Maximization of Shareholder Wealth: Managerial Strategies (slide 3 of 4) 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 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Maximization of Shareholder Wealth: Managerial Strategies (slide 4 of 4) © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 1 of 9) Sole proprietorship Partnership Corporation © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 2 of 9) Sole Proprietorship Owned by one person Represents 72 percent of all U.S. businesses Accounts for only 4.1 percent of total U.S. business revenues Advantage Easy and inexpensive to establish Disadvantages Unlimited liability to owner Difficulty raising funds to finance growth © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 3 of 9) Partnership Owned by two or more persons Represents about 10 percent of U.S. businesses Accounts for less than 15 percent of total business revenues Classified as general or limited © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 4 of 9) Partnership Advantage Limited partners’ liability is limited to what is specified in the agreement Disadvantages Partnership dissolves upon change of makeup in general partners Unlimited liability for general partners © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 5 of 9) Corporation A “legal person” composed of one or more actual individuals or legal entities Represents less than 18 percent of U.S. businesses Accounts for 81 percent of U.S. business revenues and about 61 percent of U.S. business profits © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 6 of 9) Corporation Advantages Limited Liability Permanency Flexibility Ability to Raise Capital Disadvantage Ownership is often separated from management © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 7 of 9) Corporation Corporate Organization and Governance Stockholders elect a board of directors Board of directors then elect the officers Chairman of the board Chief executive officer (CEO) Chief operating officer (COO) Chief financial officer (CFO) President Vice presidents Treasurer Secretary © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 8 of 9) Corporation Corporate Securities Represent claims against assets and future earnings of firm Priority of Corporate Securities Debt Securities Preferred Stock Common Stock © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Forms of Business Organization (slide 9 of 9) Other Types of Business Organizations Subchapter S Corporation Limited Liability Company Limited Liability Partnership © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 1 of 8) Chief Financial Officer Oversees functions of: Accounting Treasury Tax Audit © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 2 of 8) Controller Oversees functions of: Financial Accounting Cost Accounting Taxes Data Processing © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 3 of 8) Treasurer Oversees functions of: Cash and Marketable Securities Management Capital Budgeting Analysis Financial Planning Credit Analysis Investor Relations Pension Fund Management © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 4 of 8) © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 5 of 8) Financial Management and Other Disciplines Accounting Financial managers are primarily concerned with a firm’s cash flows © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 6 of 8) Financial Management and Other Disciplines Economics Microeconomics Financial managers use the concept 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, the cost of funds, and the availability of credit © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 7 of 8) Marketing, Production, Quantitative Methods, and Human Resources Management All are indirectly related to the key day-today decisions made by financial managers © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organization of the Financial Management Function (slide 8 of 8) © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Career Opportunities in Finance Corporate Finance Commercial Banks Securities Brokers Investment Banks Mutual Funds Pension Funds Real Estate Companies Insurance Companies © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Professional Finance Affiliations and Certifications Organizations Financial Executives Institute Institute of Chartered Financial Analysts Financial Management Association Certifications Certified Financial Manager (CFM) Certified Financial Planner (CFP) Chartered Financial Analyst (CFA) Certified Treasury Professional (CTP) © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Questions? 34 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
