FINANCIAL
MANAGEMENT
PREPARED BY: MS. IDA RAMOS
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
CHAPTER 1:
AN OVERVIEW OF
FINANCIAL
MANAGEMENT
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
CHARACTERISTICS OF SUCCESSFUL COMPANIES
● successful companies have skilled people
● successful companies have strong relationships
● successful companies have enough funding
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
A Bird’s-eye View of Finance
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
1. Starting Up as a Proprietorship - an unincorporated business owned by one
individual
Advantages:
a. It is easily and inexpensively formed.
b. It is subject to few government regulations.
c. Its income is not subject to corporate taxation but is taxed as part of the
proprietor’s personal income.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
1. Starting Up as a Proprietorship - an unincorporated business owned by one
individual
Limitations:
a. It may be difficult for a proprietorship to obtain the funding needed for
growth.
b. The proprietor has unlimited personal liability for the business’s debts,
which can result in losses that exceed the money invested in the
company.
c. The life of a proprietorship is limited to the life of its founder.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
2. More Than One Owner: A Partnership - two or more persons or entities
associate to conduct a noncorporate business for profit.
General Partnership - a business arrangement by which two or more individuals
agree to share in all assets, profits, and financial and legal liabilities of a jointlyowned business.
Limited Partnership - certain partners are designated general partners and
others limited partners. Limited partners can lose only the amount of their
investment in the partnership, while the general partners have unlimited liability.
Limited partners typically have no control—it rests solely with the general
partners—and their returns are likewise limited.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
2. More Than One Owner: A Partnership - two or more persons or entities
associate to conduct a noncorporate business for profit.
Limited Liability Partnership (LLP) and a Limited Liability Company (LLC), all
partners (or members) enjoy limited liability with regard to the business’s liabilities,
and their potential losses are limited to their investment in the LLP.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
3. Many Owners: A Corporation - a legal entity created under state laws, and
it is separate and distinct from its owners and managers.
Major Advantages:
a. unlimited life
b. easy transferability of ownership interest
c. limited liability
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
3. Many Owners: A Corporation - a legal entity created under state laws, and
it is separate and distinct from its owners and managers.
Advantages over Partnership:
a. Corporate earnings may be subject to double taxation—the earnings of
the corporation are taxed at the corporate level, and then earnings paid
out as dividends are taxed again as income to the stockholders.
b. Setting up a corporation involves preparing a charter, writing a set of
bylaws, and filing the many required state and federal reports, which is
more complex and time-consuming than creating a proprietorship or a
partnership.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
3. Many Owners: A Corporation - a legal entity created under state laws, and
it is separate and distinct from its owners and managers.
Professional Corporation (PC) or a Professional Association (PA) - wherein
professionals such as doctors, lawyers, and accountants form a corporation.
S corporations - corporations that meets all the requirements but elect to be
taxed as if a proprietorship or partnership.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
4. Growing a Corporation: Going Public
“Angel” or Venture Capitalists - individuals or businesses that provides funding
for companies that are too risky for banks
Securities and Exchange Commission (SEC)
➔ regulates stock trading, to sell shares in a public stock market
➔ where a company applies to be a listed stock on an SEC-registered stock
exchange
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
4. Growing a Corporation: Going Public - also called initial public offering
(IPO) because it is the first time the company’s shares are sold to the general
public.
IPOs are often aided by investment banks with brokerage firms that employs
brokers who are registered with the SEC to buy and sell stocks on behalf of
clients.
Seasoned Equity Offering - when public company raises more funds by selling
(i.e., issuing) additional shares of stock.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
5. Managing a Corporation’s Value
“What determines a corporation’s value?” - it’s a company’s ability to generate
cash flows now and in the future
Three (3) properties of its cash flows:
1. The size of the expected future cash flows is important—bigger is better.
2. The timing of cash flows counts—cash received sooner is more valuable
than cash that comes later.
3. The risk of the cash flows matters—safer cash flows are worth more than
uncertain cash flows.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
5. Managing a Corporation’s Value
Managers increase the firm’s value by increasing the size of the expected cash
flows, by speeding up their receipt, and by reducing their risk.
Free Cash Flows (FCF) - they are available (or free) for distribution to all of the
company’s investors, including creditors and stockholders
Weighted Average Cost of Capital (WACC) - the rate of return required by
investors, a cost from the company’s point of view
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Corporate Life Cycle
5. Managing a Corporation’s Value
Market Price - the price that we observe in the financial markets, should be equal
to the intrinsic value.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
Governing a Corporation
Agency Problem - a conflict of interest that exists in any relationship in which one
party is expected to act in the best interests of the other.
Corporate Governance - a set of rules that control the company’s behavior
toward its directors, managers, employees, shareholders, creditors, customers,
competitors, and community.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
Maximizing Stockholder Wealth
Maximizing Shareholder Wealth is a fiduciary duty for most corporations but this
does not mean that managers should break laws or violate ethical considerations,
or that that managers should be unmindful of employee welfare or community
concerns.
Benefit corporation (B-Corp) - a corporate form that expands directors’ fiduciary
responsibilities to include interests other than shareholders’ interests.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
Intrinsic Stock Value Maximization and Social Welfare
Illegal Actions:
●
●
●
●
Fraudulent accounting
Exploiting monopoly power
Violating safety codes
Failing environmental standards
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
Intrinsic Stock Value Maximization and Social Welfare
● ORDINARY CITIZENS AND THE STOCK MARKET
Households own mutual funds, directly or indirectly owns stocks through
pension funds. When managers increase intrinsic value of stocks, they
improve people’s quality of life.
● CONSUMERS AND COMPETITIVE MARKETS
Value maximization requires efficient, low-cost businesses that produce highquality goods and services at the lowest possible cost. companies that
maximize their stock price must generate growth in sales by creating value for
customers in the form of efficient and courteous service, adequate stocks of
merchandise, and well-located business establishments.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
Intrinsic Stock Value Maximization and Social Welfare
● EMPLOYEES AT VALUE-MAXIMIZING COMPANIES
In general, companies that successfully increase stock prices also grow and
add more employees, thus benefiting society. Moreover, studies show that
newly privatized companies tend to grow and thus require more employees
when they are managed with the goal of stock price maximization.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
Ethics and Intrinsic Stock Value Maximization
There are very few, if any, legal and ethical shortcuts making significant
improvements in the stream of future cash flows. Managers at some companies
have taken illegal and unethical actions to make estimated future cash flows
appear better than truly warranted, which can drive the market stock price up
above its intrinsic value.
Sarbanes-Oxley (SOX) Act of 2002 and the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 strengthened protection for
whistleblowers who report financial wrongdoing.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
An Overview of Financial Markets
The Net Providers and Users of Capital
Net Savers
● Public / Individuals
Net Borrowers
● Nonfinancial corporations
● Financial corporations
● Government
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Capital Allocation Process
Capital - an essential component of starting and maintaining a successful
business. In the most basic sense, it’s the money and assets needed by a
business to produce the products or services it offers.
Transfers of capital from savers to users:
1. Direct Transfers
2. Indirect Transfers through an Investment Bank
3. Indirect Transfers through a Financial Intermediary
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Capital Allocation Process
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Capital Allocation Process
There are three important features of the capital allocation process:
1. New financial securities are created.
2. Different types of financial institutions often act as intermediaries between
providers and users.
3. The activities occur in a variety of financial markets.
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
The Determinants of
Intrinsic Value
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e
END OF CHAPTER :)
BRIGHAM & EHRHARDT_FINANCIAL MANAGEMENT 15e