9
NINTH
th
EDITION
Block
Hirt Irwin/McGraw-Hill
Foundations of Financial
Management
©The McGraw-Hill Companies, Inc. 2000
Chapter
9
NINTH
th
EDITION
1
Block
Hirt Irwin/McGraw-Hill
Foundations of Financial
Management
The Field of Finance
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Chapter 1 – Outline
•
•
•
•
•
•
Definition of Finance
Short-Term vs. Long-Term Financing Decisions
Risk-Return Trade-Off
Financial vs. Real Capital
Stocks vs. Bonds
Forms of Organization
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Finance is closely related to Economics
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Economics provides a structure for decision making in areas
such as
– Risk analysis
– Pricing theory
– Comparative return analysis
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
Foundations of Financial
Management
NINTH
th
EDITION
Economics gives us a broad picture of economic environment,
which includes
– Federal Reserve and banking system
– Economic variables
• Gross Domestic Product
• Industrial Production
• Disposable Income
• Unemployment
• Inflation
• Interest rates
• Taxes
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Finance is closely related to Accounting
• Accounting provides the financial data we
use
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
There are many careers in Finance
•
•
•
•
•
•
•
•
Corporate finance officer
Banker
Stockbroker
Financial analyst
Portfolio manager
Investment banker
Financial consultant
Personal financial planner
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Finance has evolved over time (next)
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Finance emerged at the turn of the
century
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
1930s—the depression caused finance
to focus on
– preservation of capital
– maintenance of liquidity
– Corporate reorganizations
– Bankruptcy process
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Mid 1950s—finance became more
analytical
– Allocating financial capital (money)
– For the purchase of real capital (longterm plant and equipment)
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
Foundations of Financial
Management
NINTH
th
EDITION
Financial capital vs. Real capital
Financial Capital (or Accounting Capital) =
money
Real Capital (or Economic Capital) =
plant and equipment
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Recent Issues in Finance
• The risk-return relationship
• Capital structure theory (Merton and
Miller)
• Effects of inflation and disinflation
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
NINTH
9
Foundations of Financial
Management
th
EDITION
T 1-1
Figure 1-1
Functions of the Financial Manager—
Page 8
Daily
Credit management
Inventory control
Receipt and disbursement of funds
Occasional
Stock issue
Bond issue
Capital budgeting
Dividend decision
Profitability
Goal:
Maximize
Trade-off
shareholder
wealth
Risk
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Forms of Organization
Sole Proprietorship (largest in actual
number but smallest in total sales
revenue)
• Partnership
• Corporation (smallest in actual
number but largest in total sales
revenue)
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Goals of Financial Management (next
several slides)
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Agency Theory—examines the
relation between owners and
managers of the firm.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Institutional
NINTH
th
EDITION
Foundations of Financial
Management
Investors—own
larger fractions
of firms over
time.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 The ultimate measure
NINTH
th
EDITION
Foundations of Financial
Management
of performance is NOT
what the firm earns,
but how the earnings
are valued by the
investor.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
While many goals are
possible, the official goal of
the financial manager is TO
MAXIMIZE
SHAREHOLDER
WEALTH.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 As investor attitudes
NINTH
th
EDITION
Foundations of Financial
Management
and preferences
change, managers
must focus on different
things to maximize
shareholder wealth.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Here are reasons for management
to maximize shareholder wealth.
• Poor stock price performance can
lead to undesirable takeovers and
proxy fights
• Management often has incentives
such as stock and options.
• Powerful institutional investors
force management to be
responsible.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Social
Responsibility
and Ethical
Behavior
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 In most cases,
NINTH
th
EDITION
Foundations of Financial
Management
wealth
maximization is
consistent with
social
responsibility.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Sometimes, wealth
NINTH
th
EDITION
Foundations of Financial
Management
maximization leads to
socially undesirable
results:
• Pollution
• Equitable hiring practices
• Insider trading
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
The Role of Financial
Markets
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Financial markets
NINTH
th
EDITION
Foundations of Financial
Management
are meeting places
for people,
corporations and
institutions to lend or
invest money.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Public financial
NINTH
th
EDITION
Foundations of Financial
Management
markets—markets
for national, state,
and local
governments.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Corporate financial
markets—markets
for businesses to
raise money.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Short-Term vs.
Long-Term
Financing
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Working Capital is
NINTH
th
EDITION
Foundations of Financial
Management
concerned with shortterm (S/T) financing
decisions <1 year
(money markets)
ex., managing cash and
other current assets
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Capital Budgeting is
NINTH
th
EDITION
Foundations of Financial
Management
concerned with longterm (L/T) financing
decisions >1 year
(capital markets)
ex., purchasing a new
machine in the future
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Primary Markets—
NINTH
th
EDITION
Foundations of Financial
Management
Refers to the market
when private
individuals purchase
securities from the
corporation—
corporations raise
funds.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Secondary
Markets—When
investors trade
among themselves.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9 Institutions
force many types of
restructuring.
NINTH
th
EDITION
Foundations of Financial
Management
• Changes in capital structure
• Selling lower-profit business
entities.
• Removal of ineffective
management.
• Mergers and acquisitions.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Internalization of the
Financial Markets
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Increasingly, we are
seeing the emergence
of international
trade.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Many companies
are truly global
companies today.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
Students should be aware of this
trend and adjust their educations:
• Learn one or more foreign
languages.
• Take courses in international
business.
• Learn about other cultures and
people.
• Look for work experience that
teaches global business.
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000
9
NINTH
th
EDITION
Foundations of Financial
Management
THE END
Block
Hirt Irwin/McGraw-Hill
©The McGraw-Hill Companies, Inc. 2000