ch01 finance -ii

8/12/2019 ch01 Finance -II

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Chap ter 1

The Role of FinancialManagement

2001 Prentice-Hall, Inc.

Fundamentals of Financial Management, 11/e

Created by: Gregory A. Kuhlemeyer, Ph.D.

Carroll College, Waukesha, WI


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The Role o f

Financ ial Management

What is Financial

Management? The Goal of the Firm

Organization of the FinancialManagement Function


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What is Financ ial

Management?

Concerns the acquisition,

financing, andmanagementof assets

with some overall goal inmind.


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Investment Decis ions

What is the optimal firm size?

What specific assets should be

acquired?

What assets (if any) should be

reduced or eliminated?

Most

important of the three

decisions.


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Asset Management

Decis ions

How do we manage existing assets

eff icient ly?

Financial Manager has varying degrees

of operating responsibility over assets.

Greater emphasis on current assetmanagementthan fixed asset

management.


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What is the Goal

o f the Firm?

Maxim izat ion o f

Shareho lder Wealth!

Value creat ion occurs whenwe maxim ize the share pr ice

for cu rrent shareho lders.


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Sho r tcom ings of

A lternat ive Perspec t ives

Could increase current profits while

harming firm (e.g., defer maintenance,issue common stock to buy T-bills, etc.).

Ignores changes in the risk level of the

firm.

Profit Maximization

Maximizing a firms earnings after taxes.

Problems


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Sho r tcom ings of

A lternat ive Perspec t ives

Does not specify timing or duration of

expected returns.

Ignores changes in the risk level of the firm.

Calls for a zero payout dividend policy.

Earnings per Share Maximization

Maximizing earnings after taxes divided

by shares outstanding.Problems


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Streng ths o f Shareho lder

Wealth Max im izat ion

Takes account of: current and future

profits and EPS; the timing,

duration, and risk of profits and EPS;dividend policy; and all other

relevant factors.

Thus, share price serves as a

barometer for business performance.


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The Modern Corporat ion

There exists a SEPARATION

between owners and managers.

Modern Corporation

Shareholders Management


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Role o f Management

An agentis an individual

authorized by another person,called the principal, to act in

the latters behalf.

Management acts as an agent

for the owners (shareholders)

of the firm.


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Agency Theory

Agency Theory is a branch of

economics relating to thebehavior of principals and their

agents.

Jensen and Meckling developed

a theory of the firm based onagency theory.


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Agency Theory

Incentives includestock options,perquisites,andbonuses.

Principals must provide incent ives

so that management acts in the

principals best interests and then

moni torresults.


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Social Responsib i li ty

Wealth maximization does no t

preclude the firm from being socially

responsible.

Assume we view the firm as producing

bothprivate and social goods.

Thenshareholder wealth maximization

remains the appropriate goal in

governing the firm.


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Organ izat ion o f the Financ ial

Management Funct ion

Board of Directors

President

(Chief Executive Officer)

Vice President

Operations

Vice President

Marketing

VP of

Finance


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TreasurerCapital Budgeting

Cash Management

Credit Management

Dividend DisbursementFin Analysis/Planning

Pension Management

Insurance/Risk Mngmt

Tax Analysis/Planning

Organ izat ion o f the Financ ial

Management Funct ion

VP of Finance

ControllerCost Accounting

Cost Management

Data Processing

General LedgerGovernment Reporting

Internal Control

Preparing Fin Stmts

Preparing Budgets

Preparing Forecasts


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Texas Instruments BA II+

Integratedthroughout the

chaptersA useful financial

tool

Does NOT replacefinancialunderstanding


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Change Disp lay Sett ing

Change the decimal

places displayed from

2 to FloatingPress:

2nd Format

9 ENTER

2nd QUIT


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Change Periods

per Year Sett ing

Change the periods per

year from 12 to 1

Press:

2nd P/Y

1 ENTER2nd QUIT

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