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Lecture One
An Overview of Financial Management
Career opportunities
Issues of the early 2000
Forms of business organization
Goals of the corporation
Agency relationships
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Career Opportunities in Finance
Money and capital markets
Investments
Financial management
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Financial Management
Issues of Early 2000
Communication Systems
Development:: Use of computers,
electronic transfers of information
and cellular communication
The globalization of business
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Responsibilities of
the Financial Staff
Forecasting and planning
Investment and financing decisions
Coordination and control
Transactions in the financial
markets
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Alternative Forms of
Business Organization
Sole proprietorship
Partnership
Corporation
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Sole Proprietorship
Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital
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Partnership
A partnership has roughly the same
advantages and disadvantages as a
sole proprietorship.
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Corporation
Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Double taxation
Cost of set-up and report filing
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Typical Organizational Structure Chart of a Corporation
Board of Directors
President
(Chief Executive Officer)
Vice President
Manufacturing
Vice President
Marketing
Vice President
Finance
Vice President
Personnel
Treasurer
Controller
Acquisition of Funds, Capital
Budgeting, Planing, Financial
Analysis, Inventory, Cash
Management, Credit Policy
Preparation of Financial
Statements, Preparation of
Budgets, Data Processing
Payroll, Receivables, Taxes
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The Responsibilities of the Financial
Manager
Invest Funds
In Real Assets
.
In Financial Assets
Manage the Assets Acquired
Distribute the Proceeds
Raise Funds
From Financial Institutions
From the Savers Directly
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Goals of the Corporation
The primary 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?
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Factors that Affect Stock Price
Projected cash flows to
shareholders
Timing of the cash flow stream
Riskiness of the cash flows
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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
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Agency Relationship and Ethical Issues
in Finance
Goals of the Corporation
The primary 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?
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Agency Relationships
 An agency relationship exists whenever
a principal hires an agent to act on their
behalf.
 Within a corporation, agency
relationships exist between:
Shareholders and managers
Shareholders and creditors
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Shareholders 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
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Shareh olders versus Creditors
Shareholders (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.
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Fiduciary Duty
“The duty of the finest loyalty”--Supreme Court Justice Benjamin Cardozo,
1928.
The fiduciary relationship is one founded on trust or confidence
reposed by one person in the integrity, fidelity and honor of
another.
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Obligations of a Fiduciary
1. an affirmative duty to disclose to the principal any and all
information I his or her possession that bears upon any decision the
principal is about to make.
2. a special duty of care in the exercise of any and all delegated
authority, the said duty being generally defined as the degree of care,
skill, and diligence which an ordinary prudent person would exercise
in the management of ones own affairs.
3. see next slide...
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3. a specific obligation to avoid taking any personal advantage
from ones position, especially (though not only) when to do so
would result in any detriment whatsoever to the principal. The
only exception to this obligation would be specific authority
spelled out in the legal contract.
This obligation is sometimes referred to as the fiduciary ban on
self-dealing, or appropriating corporate opportunities to oneself.
This would include insider trading.
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3. a specific obligation to avoid taking any personal advantage
from ones position, especially (though not only) when to do so
would result in any detriment whatsoever to the principal. The
only exception to this obligation would be specific authority
spelled out in the legal contract.
This obligation is sometimes referred to as the fiduciary ban on
self-dealing, or appropriating corporate opportunities to oneself.
This would include insider trading.
THE COMPOSITION OF US LAW
STATUTORY LAW
SEC, FED, etc.
Prudential
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COMMON LAW
Business Judgement Rule
Fiduciary
Paramount Communication, Inc. v. Time, Inc.
The Supreme Court and other courts:
1. Interpret the U.S. Constitution
2. Interpret Statutory Law
3. Apply Common Law when necessary
Statutory Law = Set forth by US Congress and State Legislatures. US Constitution
is the foremost example.
Common Law = Law based upon rules deduced (mainly by judges) over time from
the basic customs and institutions of the people and related to their
socio/political/economic condition.
Major Factors affecting Stock Price
External Constraints
1. Antitrust Laws
2. Environmental
Regulations
3. Product and WorkPlace Safety
Regulations
4. Employment Practices
Rules
5. And So Forth
6. A Democratic Society
7. A Healthy Capitalist
System for which
TRUST is a necessary
condition
8. Agency Problem ETHICAL
Strategic Policy
Decisions Controlled
by Management
Level of Economic
Activity and
Corporate Taxes
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Stock
Market
Conditions
1. Types of Products or
Services Produced
2. Production Methods
Used
3. Relative Use of Debt
Financing
(4)
4. Dividend Policy (5)
5. And So Forth
Expected
(1)
Profitability (EPS)
Timing of Cash
Flows
(3)
Degree of Risk (2)
Stock
Market