overview of managerial finance

7/21/2019 Overview of Managerial Finance

http://slidepdf.com/reader/full/overview-of-managerial-finance-56de37b7ccae3 1/29

1

An Overview of Managerial

Finance



3

What is Finance?

Finance is concerned with decisions about

money (Cash Flows)

Finance decisions deal with how money is

raised and usedEverything else being eual!

More value is "referred to less

#he sooner cash is received the more value it has

$ess ris%y assets are more valuable than ris%ier

assets



4

&eneral Areas of FinanceFinancial Mar%ets and 'nstitutionsan%s 'nsurance Com"anies *aving + $oans Credit ,nions etc-

'nvestments *toc% ro%erage .rms Financial 'nstitutions 'nvestment Com"anies 'nsurance

Com"anies etc-

Financial *ervicesFinancial Consultants Auditing Firms etc

Managerial FinanceAll ty"e of Firms ma%ing Financial /ecisions concerning cash 0ows-



Managerial Finance #he ty"es of duties encountered in managerial

.nance!

ma%ing decisions about "lant e1"ansions to

choosing what ty"es of securities to issue to

.nance such e1"ansions-deciding the credit terms under which customers

can buy how much inventory the .rm should

carry how much cash to %ee" on hand whether

to acuire other .rms (merger analysis) and howmuch of the .rm2s earnings to reinvest in the

business and how much to "ay out as dividends-

5



FINANCE IN NONFINANCE AREAS

Management *trategic "lanning cannot be accom"lished without

considering how such "lans im"act the overall .nancial well3

being of the .rm-

4ersonnel decisions as setting salaries hiring new sta5 and

"aying bonuses must be coordinated with .nancial decisions

to ensure that any needed funds are available-

Mar%eting Four 4s of mar%eting6"roduct "rice "lace and "romotion6

determine the success of "roducts- Clearly the "rice that

should be charged for a "roduct and the amount of

advertising a .rm can a5ord for the "roduct must be

determined in consultation with .nancial managers-

6



FINANCE IN NONFINANCE AREAS(Cont.)

Accounting Financial managers rely heavily on accounting information

because ma%ing decisions about the future reuires

information about the "ast- As a conseuence accountants

must understand how .nancial managers use accounting

information in "lanning and decision ma%ing so that it can

be "rovided in an accurate and timely fashion-

Information Systems information system s"ecialists wor% with .nancial managers

to determine what information is needed how it should be

stored how it should be delivered-

Economicseconomic activity and "olicy im"act .nancial decisions and

vice versa

7



8

Finance in the Organi7ational*tructure of the Firm

Board of Directors

President (CEO)

Treasurer ControllerCredit

Manager

Inventory

Manager

Director of Capital

Budgeting

Financialand Cost

Accounting

Ta

Depart!ent

"ice#President$

Finance (CFO)

"ice#President$

%ales

"ice#President$

Infor!ation %yste!s (CIO)

"ice#President$

Operations (COO)

•Manage cash & Marketable Securities•Plan how the firm is finance

•Manage !isk•"#ersee $ension fun

• %cti#it of accounting an ta'

e$artment



(

Alternative Forms ofusiness Organi7ation

4ro"rietorshi"

4artnershi"

Cor"oration



1)

4ro"rietorshi"

Advantages!

Ease of formation

*ub8ect to few government regulations

9o cor"orate income ta1es

$imitations!

,nlimited "ersonal liability

$imited life #ransferring ownershi" is di:cult

/i:cult to raise ca"ital



11

4artnershi"

$i%e a "ro"rietorshi" e1ce"t two or

more owners

A "artnershi" has roughly thesame advantages and limitations

as a "ro"rietorshi"



1*

Cor"oration

Advantages!

,nlimited life

Easy transfer of ownershi"

$imited liability

Ease of raising ca"ital

/isadvantages!

Cost of set3u" and re"ort .ling/ouble ta1ation



;ybrid Forms of usiness

$imited $iability 4artnershi" ($$4) A

"artnershi" wherein one (or more) "artner is designated the

general partner(s) with unlimited "ersonal .nancial liability and

the other "artners are limited "artners whose liability is limited

to amounts they invest in the .rm-

$imited $iability Com"any ($$C) O5ers the

limited "ersonal liability associated with a cor"oration but the

com"any2s income is ta1ed li%e a "artnershi"

* Cor"oration A cor"oration with no more than <=

stoc%holders that elects to be ta1ed the same as "ro"rietorshi"s

and "artnershi"s so that business income is ta1ed only once-

13



usiness Organi7ed as aCor"oration! >alue Ma1imi7ed

$imited liability reduces ris% increasing

mar%et value

Ease of raising ca"ital allows ta%ing

advantage of growth o""ortunities

Ownershi" can be easily transferred

thus investors would be willing to "ay

more for a cor"oration



&oals of the Cor"oration

4rimary goal!stockholder ealthma!imi"ation#translates to

ma1imi7ing stoc% "rice-

Managerial incentives4rovide valuable incentives to %ee" the interest of management alive

and inline with stoc%holder wealth ma1imi7ation-

*ocial res"onsibility #he conce"t that businesses should be actively concerned with the

welfare of society at large-



&oal of stoc% "rice ma1imi7ation! is thisgood or is this bad for society?

it is good- First stoc% "rice ma1imi7ation reuires e:cient low3

cost "lants that "roduce high uality goods and services

that are sold at the lowest "ossible "rices- *econd stoc% "rice ma1imi7ation reuires the

develo"ment of "roducts that consumers want and

need so the "ro.t motive leads to new technology new

"roducts and new 8obs-

Finally stoc% "rice ma1imi7ation necessitates e:cientand courteous service adeuate stoc%s of merchandise

and well3located business establishments-

16



Managerial Actions toMa1imi7e *toc%holder Wealth

Ca"ital *tructure /ecisions/ecision about how much and what ty"es of debt and euity

should be used to .nance the .rm-

Ca"ital udgeting /ecisions/ecision as to what ty"es of assets should be "urchased to

hel" generate future cash 0ows-

/ividend 4olicy /ecisions/ecisions as to how much of current earnings to "ay out as

dividends rather than to retain for reinvestment in the .rm-



>alue of the FirmMar%et FactorsConsiderations

Economic Conditions&overnment @egulations and @ulesCom"etitive Environment

Firm FactorsConsiderations 9ormal O"erations (@evenues and

E1"enses)

Financing 4olicy (Ca"ital *tructure)

'nvesting 4olicy (Ca"ital udgeting)

/ividend 4olicy

'nvestor FactorsConsiderations'ncome*avingsAge$ifestyle'nterest @ates@is% Attitude

Net Cash Flos$ CF Rates of Return$ r

= CF 1

(1+ r )1+ CF 2

(1+ r )2+ ...+

CF N

(1+ r ) N =

N

Σ

t =1

CF t

(1+ r )t


http://slidepdf.com/reader/full/overview-of-managerial-finance-56de37b7ccae3 18/291(

Factors 'n0uenced by Managers

that A5ect *toc% 4rice4ro8ected earnings "er share

#iming of earnings streams

@is% of "ro8ected earnings


http://slidepdf.com/reader/full/overview-of-managerial-finance-56de37b7ccae3 19/29*)

Agency @elationshi"s

An agency relationshi" e1ists whenever a"rinci"al hires an agent to act on his or her

behalf-

An agency "roblem results when the agent

ma%es decisions that are not in the best

interest of "rinci"als-

#wo ty"es of Agency @elationshi"!

*toc%holders >s- Managers *toc%holders >s- Creditors


http://slidepdf.com/reader/full/overview-of-managerial-finance-56de37b7ccae3 20/29*1

*toc%holders versus ManagersManagers are naturally inclined to act in their own

best interests-

Mechanisms to motivate managers to act in

shareholder2s best interest

Managerial com"ensation (incentives)

4erformance shares awarded on basis of E4* e1ecutivestoc% "urchased at future time at given "rice restricted

stoc% grants to em"loyees for some time in future-

B- 4erformance share

- E1ecutive stoc% o"tion! An incentive "lan that

allows the managers to "urchase stoc% at some future time at agiven "rice-

D- @estricted stoc% grants! *toc% is granted to

em"loyees based on "erformance but does not have the right to

ownershi" of the stoc% untill some "eriod in the future-



*toc%holders versus ManagersCont-

#he threat of .ring4ossible now due to ownershi" by few large institutions li%e

"ension fund mutual funds etc-

*hareholder interventionig Funds now closely monitor .rms and in0uence

management decisions when ever needed-

#hreat of ta%eover ;ostile ta%eovers management is .red-

4oison "ill

&reen Mail

**



*toc%holders >s- Creditors

*toc%holders through management cause

the .rm to ta%e new ventures that have

much greater ris% than the creditors

antici"ated- #hat causes the value of

outstanding debt to fall- 'f the venture

become successful all bene.ts will go to

stoc%holders- 'f things go wrong thebondholders will have to share the losses-

*3



usiness Ethics

Webster! A standard of conduct

and moral behavior-G

usiness Ethics! A com"any2s

attitude and conduct toward its

em"loyees customerscommunity and stoc%holders



's being ethicalG good for "ro.t and .rm

value? #here is a "ositive correlation between

ethics and long3run "ro.tability because

ethical behavior (B) "revents .nes and legal e1"enses

() builds "ublic trust (D) attracts business from customers who a""reciate

and su""ort ethical "olicies

(H) attracts and %ee"s em"loyees of the highest

caliber (=) su""orts the economic viability of the communities

where these .rms o"erate-

*5



Cor"orate &overnance

#he set of rules2 that a .rm follows

when conducting business

&ood cor"orate governance generates

higher returns to stakeholders #hose who are associated with a businessI

sta%eholders include mangers em"loyees

customers su""liers creditors stoc%holders and

other "arties with an interest in the .rm-

*6



B- #o see% new mar%ets

- #o see% raw materials

D- #o see% new technology

H- #o see% "roduction e:ciency

=-

#o avoid "olitical and regulatoryhurdles

Fi%e reasons &rms go “international”

Multinational Cor"orations


http://slidepdf.com/reader/full/overview-of-managerial-finance-56de37b7ccae3 27/29*(

Factors /istinguishing /omesticFirms from Multinational Firms

/i5erent currency denominations

Economic and legal di5erences

$anguage di5erences

Cultural di5erences

@ole of governments4olitical ris%



Cha"ter B Essentials

What is .nance?

Finance deals with decisions about money

What are the forms of business organi7ation?

4ro"rietorshi" "artnershi" cor"orationWhat goals should .rms "ursue?

Ma1imi7e stoc%holder2s wealth

What is the role of ethics in business?

Ethical .rmsG surviveI non3ethical .rmsG donot

3)



#han% you

overview of managerial finance

Documents