Transcript Introduction to Financial Management and Analysis

An Overview of Financial and
Multinational Financial
Management
Corporate Finance
Dr. A. DeMaskey
Learning Objectives
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Questions to be answered:
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What is the role of financial management?
What are the three main areas of finance?
How are companies organized?
What are the goals of the corporation?
What key trends are affecting financial
management today?
What factors make multinational financial
management different?
What agency relationships exist within
corporations?
What three questions does financial
management seek to answer?
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What causes a company to have a
particular stock value?
How can managers make choices that
add value to their companies?
How can managers ensure that their
companies don’t run out of cash while
executing their plans?
The Field of Finance
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Capital Markets/Financial Institutions
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Investments
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Financial Management
Financial Decisions Within the
Firm
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Investment Decisions
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Financial Decisions
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Both
Financial Management and
Analysis
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Financial Management
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Financial Analysis
Alternative Forms of
Business Organization
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Sole proprietorship
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Partnership
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Corporation
Sole Proprietorship
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Advantages:
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Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
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Limited life
Unlimited liability
Difficult to raise capital
Partnership
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A partnership has roughly the same
advantages and disadvantages as a sole
proprietorship.
Corporation
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Advantages:
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Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
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Double taxation
Cost of set-up and report filing
Goals of the Corporation
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The primary goal is shareholder wealth
maximization, which translates to
maximizing stock price.
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Should firms behave ethically? YES!
Do firms have any responsibilities to
society at large? YES! Shareholders are
also members of society.
Goals of the Corporation
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Maximizing the owners’ wealth
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Maximizing shareholders’ wealth
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Maximizing the price per share
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Maximizing economic profits
Economic Profit Versus
Accounting Profit
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Economic profit
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Opportunity cost
Normal profit
Accounting profit
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Ignores opportunity costs and normal
profits
Does not reflect the firm’s actual cash
flows
Is maximizing stock price good for
society, employees, and customers?
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Employment growth is higher in firms
that try to maximize stock price. On
average, employment goes up in:
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firms that make managers into owners
(such as LBO firms)
firms that were owned by the government
but that have been sold to private investors
Is maximizing stock price good for
society, employees, and customers?
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Consumer welfare is higher in capitalist
free market economies than in
communist or socialist economies.
Fortune lists the most admired firms.
In addition to high stock returns, these
firms have:
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high quality from customers’ view
employees who like working there
Factors That Affect the Firm’s
Stock Price
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Internal Factors
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Amount of cash
flows expected by
shareholders
Timing of the cash
flow stream
Risk of the cash
flows
Use of debt
Dividend policy
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External Factors
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Legal constraints
General level of
economic activity
Tax laws
Conditions in the
stock market
Investor expectations
Three Determinants of Cash
Flows
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Sales
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Current level
Short-term growth rate in sales
Long-term sustainable growth rate in sales
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Operating expenses
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Capital expenses
Factors that Affect the Level and
Risk of Cash Flows
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Decisions made by financial managers:
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Investment decisions (product lines,
production processes, geographic market,
use of technology, marketing strategy)
Financing decisions (choice of debt policy
and dividend policy)
The external environment
Financial Management
Issues of the New Millennium
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Use of computers and electronic
transfers of information
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The globalization of business
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Corporate governance
Agency Relationships
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An agency relationship exists whenever
a principal hires an agent to act on his
or her behalf.
Within a corporation, agency
relationships exist between:
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Shareholders and managers
Shareholders and creditors
Shareholders versus Managers
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Managers are naturally inclined to act in
their own best interests.
But the following factors affect
managerial behavior:
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Managerial compensation plans
Direct intervention by shareholders
The threat of firing
The threat of takeover
Shareholders versus Creditors
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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.
What is a multinational
corporation?
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A multinational corporation is one that
operates in two or more countries.
At one time, most multinationals
produced and sold in just a few
countries.
Today, many multinationals have worldwide production and sales.
Why do firms expand into
other countries?
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To seek new markets
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To seek new supplies of raw materials
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To gain new technologies
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To gain production efficiencies
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To avoid political and regulatory obstacles
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To reduce risk by diversification
What are the major factors that
distinguish multinational from
domestic financial management?
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Exchange rate risk
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Economic risk
Political risk
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Currency differences
Government roles
Cultural, legal, and institutional differences
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Cultural differences
Language differences
Legal differences