Transcript Chapter 1 An Overview of Managerial Finance © 2005 Thomson/South-Western Career Opportunities in Finance  Financial Markets and Institutions  Investments  Managerial Finance.

Chapter 1
An Overview of
Managerial
Finance
© 2005 Thomson/South-Western
Career Opportunities in
Finance
 Financial Markets and Institutions
 Investments
 Managerial Finance
2
Managerial Finance
in the Twentieth Century
 Business globalization
 Information technology
 Regulatory attitude of the government
3
Alternative Forms of
Business Organization
 Proprietorship
 Partnership
 Corporation
4
Proprietorship
 Advantages:
 Ease of formation
 Subject to few government regulations
 No corporate income taxes
 Limitations:




Unlimited personal liability
Difficult to raise capital
Transferring ownership is difficult
Limited life
5
Partnership
 Like a proprietorship, except two or
more owners
 A partnership has roughly the same
advantages and limitations as a
proprietorship
6
Corporation
 Advantages:




Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
 Disadvantages:
 Double taxation
 Cost of set-up and report filing
7
Finance in the Organizational
Structure of the Firm
Board of Directors
President
Vice-President:
Sales
Vice-President:
Operations
Treasurer
Credit
Manager
Inventory
Manager
Director of
Capital
Budgeting
Vice-President:
Finance
Vice-President:
Information Systems
Controller
Cost
Financial
Tax
Accounting Accounting Department8
The Financial Manager’s
Responsibilities
 Forecasting and planning
 Major investment and financing decisions
 Coordination and control
 Dealing with financial markets
9
Goals of the Corporation
 Primary goal:stockholder wealth
maximization-- translates to maximizing
stock price.
 Managerial incentives
 Social responsibility
 Stock price maximization and social welfare
10
Managerial Actions to
Maximize Stockholder Wealth
 Capital Structure Decisions
 Capital Budgeting Decisions
 Dividend Policy Decisions
11
Factors Influenced by
Managers that Affect Stock
Price
 Projected earnings per share
 Timing of earnings streams
 Riskiness of projected earnings
 Use of debt (capital structure)
 Dividend policy
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Value of the Firm
Market Factors/Considerations
Economic Conditions
Government Regulations and Rules
Competitive Environment
Firm Factors/Considerations
Normal Operations
Financing Policy
Investing Policy
Dividend Policy
Investor Factors/Considerations
Income/Savings
Age/Lifestyle
Interest Rates
Risk Attitude
Net Cash Flows, CF
Rates of Return, k
Value of the Firm
=
^ +
CF
1
(1+k)1
N
^
^
^
CF2 + . . . + CFN = CF
t
(1=k)2
(1+k)N
t=1
(1+k)t
13
Agency Relationships
 An agency relationship exists whenever a
principal hires an agent to act on their
behalf.
 Within corporations, agency relationships
exist between:
 Stockholders and managers, and
 Stockholders and creditors.
14
Stockholders versus Managers
 Managers are naturally inclined to act
in their own best interests.
 But the following factors affect managerial
behavior:
 The threat of firing
 The threat of takeover
 Structuring managerial incentives
15
Stockholders versus Creditors
 Stockholders (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.
16
The External Environment
Summary of Major Factors Affecting Stock Prices
External
Constraints:
1. Antitrust Laws
2. Environmental
Regulations
3. Product and
Workplace Safety
Regulations
4. Employment
Practices Rules
5. Federal Reserve
Policy
6. International
Developments
Strategic Policy
Decisions Controlled
by Management
1. Types of Products
and Services
Produced
2. Production Methods
Used
3. Relative Use of Debt
Financing
Level of Economic
Activity and
Corporate Taxes
Stock Market
Conditions
Expected
Profitability
Timing of Cash
Flows
Stock Price
Degrees of Risk
4. Dividend policy
17
Business Ethics
 Webster: “A standard of conduct and moral
behavior.”
 Business Ethics: A company’s attitude and
conduct toward its employees, customers,
community, and stockholders
18
Forms of Business in
Other Countries
 Non-US firms have higher
19concentrations of ownership
 Nature of relationship with financial
institutions differs from U.S.
 U.S. firms have a more dispersed
ownership
19
Multinational Corporations
Firms that operate in two or more countries
Five reasons firms go “international”
1.
2.
3.
4.
5.
To
To
To
To
To
seek new markets
seek raw materials
seek new technology
seek production efficiency
avoid political and regulatory hurdles
20
Multinational Versus
Domestic Managerial Finance
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Factors Distinguishing
Domestic Firms from
Multinational Firms
1.
2.
3.
4.
5.
6.
Different currency denominations
Economic and legal ramifications
Language differences
Cultural differences
Role of governments
Political risk
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End of Chapter 1
An Overview of
Managerial Finance
23