Professional Documents
Culture Documents
The Role of Financial Management: Lecture No 1
The Role of Financial Management: Lecture No 1
Finance
WHAT IS BUSINESS
FINANCE?
Raising and managing of funds by
business organizations.
THE ROLE OF
FINANCIAL MANAGEMENT
WHAT IS FINANCIAL
MANAGEMENT?
Concerns the acquisition, financing,
and management of assets with
some overall goal in mind.
INVESTMENT DECISIONS
Most
FINANCING DECISIONS
Determine
ASSET MANAGEMENT
DECISIONS
How do we manage existing assets
efficiently?
Financial Manager has varying
degrees of operating responsibility
over assets.
Greater emphasis on current asset
management than fixed asset
management.
Maximization of
Shareholder Wealth!
Value creation occurs when we
maximize the share price for current
shareholders.
SHORTCOMINGS OF ALTERNATIVE
PERSPECTIVES
Profit
Maximization
Maximizing
taxes.
Problems
SHORTCOMINGS OF
ALTERNATIVE PERSPECTIVES
Earnings
per Share
Maximization
Maximizing
Problems
STRENGTHS OF
SHAREHOLDER WEALTH
MAXIMIZATION
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
Modern Corporation
Shareholders
Management
ROLE OF MANAGEMENT
Management acts as an agent for the
owners (shareholders) of the firm.
AGENCY THEORY
Jensen
AGENCY THEORY
Principals
SOCIAL RESPONSIBILITY
Wealth
CORPORATE GOVERNANCE
Corporate
BOARD OF DIRECTORS
Typical
Set
responsibilities:
company-wide policy;
Advise the CEO and other senior executives;
Hire, fire, and set the compensation of the
CEO;
Review and approve strategy, significant
investments, and acquisitions; and
Oversee operating plans, capital budgets,
and financial reports to common
shareholders.
ORGANIZATION OF THE
FINANCIAL MANAGEMENT
FUNCTION
Board of Directors
President
(Chief Executive Officer)
Vice President
Operations
VP of
Finance
Vice President
Marketing
Sole Proprietorships
Partnerships (general and limited)
Corporations
Limited liability companies
SUMMARY FOR
SOLE PROPRIETORSHIP
Advantages
Simplicity
Low setup cost
Quick setup
Single tax filing on
individual form
Disadvantages
Unlimited liability
Hard to raise additional
capital
Transfer of ownership
difficulties
THE BUSINESS
ENVIRONMENT
Partnership -- A business form
in which two or more
individuals act as owners.
Advantages
Can be simple
Low setup cost, higher than
sole proprietorship
Relatively quick setup
Limited liability for limited
partners
Disadvantages
Unlimited liability for the
general partner
Difficult to raise additional
capital, but easier than sole
proprietorship
Transfer of ownership
difficulties
THE BUSINESS
ENVIRONMENT
Corporation -- A business form
legally separate from its
owners.
An artificial entity that can own assets and incur
liabilities.
Business income is accounted for on the income tax
form of the corporation.
Disadvantages
Double taxation
More difficult to
establish
More expensive to
set up and maintain
THE BUSINESS
ENVIRONMENT
Limited Liability Companies -- A
business form that provides its
owners (called members) with
corporate-style limited personal
liability and the federal-tax
treatment
ofisaaccounted
partnership.
Business
income
for on each
members individual income tax form.
LIMITED LIABILITY
COMPANY (LLC)
Generally, an LLC will possess only
the first two of the following four
standard corporation characteristics
Limited liability
Centralized management
Unlimited life
Transfer of ownership without other owners prior
consent
Advantages
Limited liability
Eliminates double
taxation
No restriction on number
or type of owners
Easier to raise additional
capital
Disadvantages
Limited life
(generally)
Transfer of
ownership difficulties
(generally)
FINANCIAL ENVIRONMENT
Businesses
TYPES OF FINANCIAL
MARKETS
PRIMARY MARKET: IN WHICH
TYPES OF FINANCIAL
MARKETS
MONEY MARKET: IN WHICH