FOUNDATIONS OF FINANCIAL MANAGEMENT
Ohio UniversityCollege of Business
How do we learn?
There are primarily seven ways
How do we learn?
1. Discussion2. Practice doing3. Reading4. Lecture5. Audiovisual6. Teach others7. Demonstration
What do you think of when someone says “finance”?
We need money to live (food, clothing, shelter) and we probably want money for a great number of things (concert tickets, cars, computers, etc.).
Run your own firm - how to invest and how to raise money.
Teaches us to understand the other side of every transaction. If you understand what your employer wants, it is easier to achieve this and hence you are in a better position for raises and promotions.
Why is finance important personally?
Few people will not work their entire life at the same firm. Knowing in advance your financial position and options dramatically reduces your stress in this time of change.
Taxes can take 40% of what we earn. Making the right investments can cut this tax burden.
Star athletes have gone from making millions to flat broke.
Why is finance important personally?
US Fiscal Condition
United States Tax revenue: $2,170,000,000,000Fed budget: $3,820,000,000,000New debt: $1,650,000,000,000National debt: $14,271,000,000,000Recent budget cut: $38,500,000,000
Make the #s relevant
Annual family income: $21,700Money the family spent: $38,200New debt on the credit card: $16,500Outstanding balance on credit card: $142,710Total budget cuts: $385http://www.youtube.com/watch?v=Li0no7O9zmE
How is Finance related to other fields? Marketing
Budgets, marketing research, marketing financial products
Accounting Dual accounting and finance function,
preparation of financial statements Management
Strategic thinking, job performance, profitability Personal finance
Budgeting, retirement planning, college planning, day-to-day cash flow issues
Daniel Pink – Does $ Increase Performance?
http://www.youtube.com/watch?v=u6XAPnuFjJc
Finance: The Art and Science of Managing Money
Finance Utilizes?
Economics Accounting
Financial analysis is like a…
Analyst’s opinion of GM
Dec 07
Strong Buy 4
Buy 3
Hold 7
Underperform 3
Sell 1
What do you see?
What do you see?
What do you see?
Count every “F” below?
FINISHED FILES ARE THE RE SULT OF YEARS OF SCIENTI FIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS...
What number goes in the triangle?
Organizations that hire Finance Grads
Banks Insurance Companies Any Large Business Investment Bankers Stockbrokers
Careers in Finance
Commercial Banking
Financial Planning Insurance Real Estate Money
Management Corporate Finance
Overview of Semester
Intro to Finance Accounting Review Financial Statement Analysis Time Value of Money Capital Budgeting Stock and Bond Valuation
CHAPTER 1AN OVERVIEW OF FINANCIAL MANAGEMENT
Forms of Businesses Goals of the Corporation Agency Relationships Ethics in Finance
Key Concepts and Skills
Have a good understanding of: The basic types of financial
management decisions and the role of the financial manager
The goal of financial management The financial implications of the
different forms of business organization
The conflicts of interest that can arise between owners and managers
Basic Areas Of Finance
1. Corporate finance = Business Finance2. Investments3. Financial institutions4. International finance
Investments
Work with financial assets such as stocks and bonds
Value of financial assets, risk versus return, and asset allocation
Job opportunities Stockbroker or financial advisor Portfolio manager Security analyst
Financial Institutions
Companies that specialize in financial matters Banks – commercial and investment, credit
unions, savings and loans Insurance companies Brokerage firms
Job opportunities
International Finance
An area of specialization within each of the areas discussed so far
May allow you to work in other countries or at least travel on a regular basis
Need to be familiar with exchange rates and political risk
Need to understand the customs of other countries; speaking a foreign language fluently is also helpful
Why Study Finance?
Marketing Budgets, marketing research, marketing
financial products Accounting
Dual accounting and finance function, preparation of financial statements
Management Strategic thinking, job performance, profitability
Personal finance Budgeting, retirement planning, college
planning, day-to-day cash flow issues
Business Finance
Some important questions that are answered using finance What long-term investments should the
firm take on? Where will we get the long-term financing
to pay for the investments? How will we manage the everyday financial
activities of the firm?
Financial Manager
The top financial manager within a firm is usually the Chief Financial Officer (CFO) Treasurer – oversees cash management, credit
management, capital expenditures, and financial planning
Controller – oversees taxes, cost accounting, financial accounting, and data processing
Financial Management Decisions Capital budgeting
What long-term investments or projects should the business take on?
Capital structure How should we pay for our assets? Should we use debt or equity?
Working capital management How do we manage the day-to-day finances
of the firm? Financial managers try to answer some, or
all, of these questions
Forms of Business Organization
Three major forms in the United StatesSole proprietorshipPartnership
GeneralLimited
CorporationS-CorpLimited liability company (LLC)
Sole Proprietorship
Advantages Easiest to start Least regulated Single owner keeps
all of the profits Taxed once as
personal income
Disadvantages Limited to life of
owner Equity capital
limited to owner’s personal wealth
Unlimited liability Difficult to sell
ownership interest
Business owned by one person
Partnership
Advantages Two or more
owners More capital
available Relatively easy to
start Income taxed once
as personal income
Disadvantages Unlimited liability Partnership
dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
Business owned by two or more persons
Corporation
Advantages Limited liability Unlimited life Separation of
ownership and management
Transfer of ownership is easy
Easier to raise capital
Disadvantages Separation of
ownership and management (agency problem)
Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible)
A legal “person” distinct from owners and a resident of a state
International Corporate Forms All of these forms feature public
ownership and limited liability
Financial Goals of the Corporation
The primary financial goal is _______________.
Goal Of Financial Management What should be the goal of a
corporation? Maximize the market value of the
existing owners’ equity Maximize the current value per share
of the company’s existing stock
Goal Of Financial Management Does this mean we should do
anything and everything to maximize owner wealth? Outsourcing? Off-shoring? Enron? Corporate support of charities?http://globalpublicsquare.blogs.cnn.com/2012/09/27/why-outsourcing-shouldnt-be-a-dirty-word/
Why not maximize profits?
Is stock price maximization the same as profit maximization?
No, despite a generally high correlation amongst stock price, EPS, and cash flow.
Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa).
The goal of the financial manager is to maximize the value of the firm.
What determines a firm’s value? A firm’s value is the present value of all
future cash flows.
Market Capitalizations
AFLAC Inc.Apple Inc.Best Buy Co., Inc.Exxon Mobil CorporationFord Motor Co.Google Inc.Microsoft CorporationStarbucks CorporationWal-Mart Stores Inc.
Apple Inc. 481BExxon Mobil 429BGoogle Inc. 375BMicrosoft Corporation
293B
Wal-Mart Stores Inc.
250B
Ford Motor Co. 63BStarbucks Corporation
56B
AFLAC Inc. 30BBest Buy Co., Inc. 12B
What is Ethical Behavior?
Ethical behavior tends to be good for business and involves demonstrating respect for key moral principles that include honesty, fairness, equality, dignity, diversity and individual rights.
Agency relationships
An agency relationship exists whenever a principal hires an agent to act on their behalf.
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 versus Managers Managers are naturally inclined to act in
their own best interests. But the following factors affect
managerial behavior: Stock option plans The threat of firing (Board of Directors,
large stockholder, other managers) The threat of takeover
There's No Such Thing As "Business" Ethics : There's Only One Rule for Making Decisions
Sarbanes-Oxley Act of 2002
Major focus is to make sure that publicly-traded corporations accurately present their financial statements.
Longer jail sentences Made CEOs responsible for the fin. stmts.
Sarbanes-Oxley Act
Driven by corporate scandals Enron, Tyco, WorldCom, Adelphia
Intended to strengthen protection against accounting fraud and financial malpractice
Compliance very costly Firms driven to:
Go public outside the U.S.Go private (“go dark”)