CHAPTER 1

An Overview
I. Financial Management
 Goal of the Financial Manager
1. Maximize Profit?
2. This technique ignores:
 Timing KONSEP SALAH
 Cash flows
 Risk
 Goal of the Financial Manager
The basic goal: to create stock-
holder value
1. Maximizing Shareholder Wealth
2. Preserving Stakeholder Wealth
3. The Agency Issue
KONSEP BENAR
4. The Role of Ethics
What is an agency relationship?

An agency relationship arises whenever one

or more individuals, called principals,:
(1) hires another individual or organization,
called an agent, to perform some service and
(2) then delegates decision-making authority to
that agent.
There are 3 potential agency conflicts:

 Conflicts between stockholders and

managers.
 Conflicts between stockholders and
creditors.
 Conflicts among stockholders, managers,
and creditors.
Problem:

1. If you are the only employee, and only your

money is invested in the business, would
any agency problems exist?
2. If you expanded and hired additional
people to help you, might that give rise to
agency problems?
3. If you needed additional capital to buy
computer inventory or to develop software,
might that lead to agency problems?
4. Would it matter if the new capital came in
the form of an unsecured bank loan, a bank
loan secured by your inventory of
computers, or from new stockholders?
5. As the founder-owner-president of the
company, what actions might mitigate your
agency problems if you expanded beyond
your home campus?
6. Would going public in an IPO increase or
decrease agency problems?
What kind of compensation program
might you use to minimize agency
problems?
 “Reasonable” annual salary to
meet living expenses
 Cash (or stock) bonus
 Options to buy stock or actual shares of
stock to reward long-term performance
 Tie bonus/options to EVA
II. Time Value of Money

 Most financial decisions involve

benefits and costs that are spread
out over time- the time value of
money establishes a relationship
between cash flows received
and/or paid at different points in
time.
The Role of Time Value in Finance
 Future versus Present Value
 Time lines can be used to depict cash flows
 Compounding is used to find future value
 Discounting is used to find present value
 Computational aids
 Financial tables of interest factors
 Business/Financial calculators
 Future Value Formula

FVn = PV (1+k)n
FVn = Future value at the end of the year n

PV = Present value, or original principal amount

k = Annual rate of interest paid

n = Number of periods (usually years) separating the

present value and the future value, or number of years the

Basic future value of an annuity formula

FVAn = PMT x (FVIFAk,n)

Where: PMT = payment, or the amount of one cash flow

FVIFA factors are found in Table A-2
Note: n should equal the number of payments!
 Example
What is the future value of an ordinary, eight-year annuity of
$100 compounded at 7% annually?
FVA8=?
$100 $100 $100 $100 $100 $100 $100 $100
0 1 2 3 4 5 6 7 8
WHAT WE KNOW!
k = 7%, n = 8, PMT = $100
FVA8 = $100 x (FVIFA7%,8) FVA8 = $100 x (10.260)
FVA8 = $1,026.00
 Present Value Formula

PV = FV n (
1 n
)
1+k

= FVn X (PVIFk,n)
PVIF factors are found in Table A-1

Copyright ã1994, HarperCollins Publishers

 Present Value of An Annuity
Annuity streams are, once again, equally sized and
spaced

· The present value of an annuity is the lump-sum

amount needed today to permit equal-sized and
equal-spaced withdrawals for 'n' periods

· This is also the technique used to compute payments

on installment loans
 Basic formula:

PVAn = PMT x (PVIFAk,n)

WHERE:
PVIFAk,n is the present-value interest factor for an
annuity (Table A-1)
The values in the PVIFA table are an accumulation
of the values from the PVIF table (Table A-2)