Chap 1 an overview of financial management
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Transcript of Chap 1 an overview of financial management
Financial Management
Theory and Practice
Tenth Edition
Eugene F. Brigham
Michael C. Ehrhardt
Chapter 1
Goals and Governance of the Firm
Instructor: Sanam TaimoorInstitute of Business Management
Topics
• What is Financial Management
• Finance and You
• How are companies organized
• Goals of Corporations
• Business Ethics and Social Responsibility
• Agency Relationship
2Chapter 1 Brigham & Ehrhardt 10 ed
What is Financial Management
The planning, directing, monitoring, organizing, and controlling of the monetary resources of
an organization
• Main issues in financial management
– Factors determining company’s stock price
– Managers’ choices to add value
– Ensuring sufficient cash levels
3Chapter 1 Brigham & Ehrhardt 10 ed
Finance and Your Career
• Capital Markets and Institution– Stock Markets, Commodities Markets, Banks,
Insurance Companies, Mutual Funds
• Investments– Brokerage Houses
– Main function in investments:• Sales
• Analysis of individual securities
• Determining optimal mix of securities
• Financial Management
4Chapter 1 Brigham & Ehrhardt 10 ed
Forms of Organizations
• Sole Proprietorship
• Partnership
• Corporations
• Note: Read Pages 6-9
5Chapter 1 Brigham & Ehrhardt 10 ed
Finance in Organizational Structure of the Firm
Board of Directors
CEO
Vice President
Sales
Vice President Finance
Treasurer
Credit Manger
Inventory Manager
Capital Budgeting Manager
Controller
Cost Accountant
Financial Accountant
Tax Accountant
Vice President Marketing
6Chapter 1 Brigham & Ehrhardt 10 ed
Goals of the Corporations
• What should be the main goal of the organization?
• Stock Price Maximization and not Profit Maximization
– Stockholders are society
– Consumer Benefit
– Employee Benefit
7Chapter 1 Brigham & Ehrhardt 10 ed
How to maximize Stock Price?
• What determines stock price?
– Company’s ability to generate cash flows now and in the future
• Determinants of cash flows
– Unit Sales
– After-tax operating margins
– Capital Requirement
8Chapter 1 Brigham & Ehrhardt 10 ed
Ethics and Social Responsibility
• Business Ethics– “Standard of conduct and moral behavior”
– “A company’s attitude and conduct towards its employees, customers, community and stockholders”
(Fundamentals of Financial Management. Brigham and Houston – 10th Edition)
• Social Responsibility– Only shareholders’ interests or welfare of
employees and society as well?
9Chapter 1 Brigham & Ehrhardt 10 ed
Agency Relationship
• Agency relationship arises when a principle hires an agent to perform duties on behalf of the principle
• Within financial management primary agency relationships are
– Between stockholders and managers
– Between stockholders and creditors
10Chapter 1 Brigham & Ehrhardt 10 ed
Agency Conflict
• Occurs when agents behave in their own interests rather then those of the principle’s
• Ways to avoid agency conflicts”
– Managerial Compensation
– Direct intervention by shareholders
– Threat of firing
– Threat of takeover
11Chapter 1 Brigham & Ehrhardt 10 ed