Chapter 1 -- The Role of Financial Management · PDF fileVan Horne / Wachowicz Tenth Edition...
Transcript of Chapter 1 -- The Role of Financial Management · PDF fileVan Horne / Wachowicz Tenth Edition...
Type of Business andType of Business and
The Role of Financial The Role of Financial ManagementManagement
Type of Business andType of Business and
The Role of Financial The Role of Financial ManagementManagement
Organizing a BusinessOrganizing a Business
Types of Business Organizations
Sole Proprietorships
Partnerships
Corporations
Sole
Proprietorship
Partnership Corporation
Who owns the
business?
The manager
Partners Shareholders
Are managers
and owners
separate?
No No Usually
What is the
owner’s
liability?
Unlimited Unlimited Limited
Are the owner
& business
taxed
separately?
No No Yes
Organizing a BusinessOrganizing a Business
Corporate StructureCorporate Structure
Sole Proprietorships
Corporations
Partnerships
Limited Liability
Corporate tax on profits
+
Personal tax on
dividends
Unlimited Liability
Personal tax on profits
What is the Goal of What is the Goal of the Firm?the Firm?
Maximization of Maximization of Shareholder Wealth!Shareholder Wealth!
Value creation occurs when we maximize the share price for current shareholders.
Financial
Manager
Firm's
operations Investors
(1) Cash raised from investors
(1)
(2) Cash invested in firm
(2)
(3) Cash generated by operations
(3)
(4a) Cash reinvested
(4a)
(4b) Cash returned to investors
(4b)
The Role of The Financial Manager
Real
assets
Investment Decisions
What is the optimal firm size?
What specific assets should be acquired?
What assets (if any) should be reduced or eliminated?
Most important of the three Most important of the three
decisionsdecisions..
Financing DecisionsFinancing Decisions
What is the best type of financing?
What is the best financing mix?
What is the best dividend policy?
How will the funds be physically acquired?
Determine how the assets (LHS of Determine how the assets (LHS of
balance sheet) will be financed (RHS balance sheet) will be financed (RHS
of balance sheet).of balance sheet).
Asset Management DecisionsAsset 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.
Goals of The CorporationGoals of The Corporation
Shareholders desire wealth maximization
Do managers maximize shareholder wealth?
Mangers have many constituencies “stakeholders”
“Agency Problems” represent the conflict of interest between management and owners
Role of ManagementRole of Management
An An agentagent is an individual authorized is an individual authorized by another person, called the by another person, called the principal, to act in the latter’s principal, to act in the latter’s behalf.behalf.
Management acts as an agentagent
for the owners (shareholders)
of the firm.
Agency TheoryAgency Theory
Agency TheoryAgency Theory is a branch of economics relating to the behavior of principals and their agents.
Jensen and Meckling developed
a theory of the firm based on
agency theoryagency theory.
Agency TheoryAgency Theory
Principals must provide incentivesincentives
so that management acts in the
principals’ best interests and then
monitormonitor results.
Irwin/McGraw-Hill
Financial MarketsFinancial Markets
Company
Issue Debt
CashInvestors
Irwin/McGraw-Hill
Financial MarketsFinancial Markets
Funds
Funds
Banks
Insurance Cos.
Brokerage Firms
Obligation
s
Depositors
Policyholders
Investors
Obligation
s
Company
Intermediary
Investor
Irwin/McGraw-Hill
Financial MarketsFinancial Markets
Banks
Depositors
$2.5 mil
Cash
Loan
Deposits
Company
Intermediary
Investor
Financial Public RelationsFinancial Public Relations
and Investor Relationsand Investor Relations
WHAT IS PR ?
PR Involves a Variety of Programmes
Designed to Promote or Protect a
Company,s Image or its Products
Evaluate public Attitudes
Identifies issues of Identifies issues of public concern
programs to gain public acceptance
Executes programs to gain public acceptance
The Role of The Role of
Public RelationsPublic Relations
Functions of Public Functions of Public RelationsRelations
Press Relations Press Relations
Product PublicityProduct PublicityProduct PublicityProduct Publicity
Corporate CommunicationCorporate CommunicationCorporate CommunicationCorporate Communication
Public AffairsPublic AffairsPublic AffairsPublic Affairs
LobbyingLobbyingLobbyingLobbying
Employee and Investor RelationsEmployee and Investor RelationsEmployee and Investor RelationsEmployee and Investor Relations
Crisis ManagementCrisis ManagementCrisis ManagementCrisis Management
Investor RelationsInvestor RelationsInvestor relations is defined as “a strategic
management responsibility that integrates finance,
communication, marketing and securities law
compliance to enable the most effective two way
communication between a company, the financial
community, and other constituencies, which
ultimately contributes to a company’s securities
achieving fair valuation”.
1. Investor relations is responsible for raising shareholder capital to enable corporations to implement their visioninto reality.
2. Investor relations helps companies survive through variousstages of their development by enabling access to shareholder capital.
3. Investor relations ensures corporate executives are doing everything they can to lead corporations to long-term sustainable growth, while simultaneously benefiting the society and providing financial returns to shareholders.
Benefits of Benefits of Investor RelationsInvestor Relations