Chapter 1
Contemporary Financial
Management
Revolution of the Finance Function
• 1900-1920: Focus on legal issues surrounding
capital markets
• 1920’s: Corporate expansion, new technologies
(e.g TV), and new financial instruments (e.g
mutual funds)
• Post-1945: Current focus on financial implications
of business decisions (i.e. investment, value
maximization)
Revolution of the Finance Function
• Big changes in the 1980s – 2000s
– Disinflation
– Revolution in telecommunications
– Better macroeconomic management
– Large-scale asset securitization: cash flows of
assets are repackaged and sold to investors
through the capital markets
– Growth of so-called BRIC countries
Revolution of the Finance Function
• Major trends that continue to affect corporate
financial management:
1. Globalization of business and financial
management
2. Fallout from the accounting and financial scandals
of the past several years (e.g. Enron, Worldcom).
Recent bankruptcies (e.g. Lehman Brothers) are
the result of excessive leverage and poor financial
management.
Revolution of the Finance Function
• Critical components of success
– Need new framework built on sound financial
principles and transparency to gain public trust
– Well-informed business decisions based on
knowledge of financial management principles
and techniques
– While there are no rules and regulations that
guarantee success…
Goals of Financial Management
– Maximize the value of firm’s outstanding common
stock
– Maximize earnings per share (not only total
profits)
– Timing of increased earnings is important! Must
consider the present value of future earnings
– Balance between business and financial risk
Goals of Financial Management
• Business risk: Risk imposed by business
environment and economic cycle in which firm
operates
– Ex. Expected future demand for electricity is less
difficult to predict than expected future demand
for most high-technology products
• Financial risk: Risk imposed by manner in
which firm is financed
– Ex. The more debt employed, the greater risk of
insolvency
Goals of Financial Management
• Overall objective:
– Maximization of earnings per share of common
stock subject to consideration of business and
financial risk, time of earnings, and impact of
dividend policy.
Organization and Structure of the Book
1.
2.
3.
4.
5.
6.
7.
Introduction
Fundamentals of financial accounting
Financial analysis
Working capital management
Long-term investment decisions
Long-term financing decisions
Special topics
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Corporate governance and risk management
International finance
Mergers and acquisitions