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1-0 1-0
Financial Management
Presented by
Dr.M.Chandrasekaran
0
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin
1
Chapter 1
Introduction to
Financial
Management
1-2 1-2
2
Key Concepts and Skills
• Know the basic types of financial
management decisions and the role of
the financial manager
• Know the financial implications of the
different forms of business organization
• Know the goal of financial management
• Understand the conflicts of interest that
can arise between owners and
managers
1-3 1-3
3
Chapter Outline
• Finance: A Quick Look
• Business Finance and The Financial
Manager
• Forms of Business Organization
• The Goal of Financial Management
• The Agency Problem and Control of the
Corporation
• Financial Markets and the Corporation
1-4 1-4
4
Basic Areas Of Finance
• Corporate finance
• Investments
• Financial institutions
• International finance
1-5 1-5
5
Investments
• Work with financial assets such as
stocks and bonds
• Value of financial assets, risk versus
return, and asset allocation
• Job opportunities
– Stockbroker or financial advisor
– Portfolio manager
– Security analyst
1-6 1-6
6
Financial Institutions
• Companies that specialize in financial
matters
– Banks – commercial and investment, credit
unions, savings and loans
– Insurance companies
– Brokerage firms
• Job opportunities
1-7 1-7
7
International Finance
• This is an area of specialization within each of
the areas discussed so far
• It may allow you to work in other countries or
at least travel on a regular basis
• Need to be familiar with exchange rates and
political risk
• Need to understand the customs of other
countries; speaking a foreign language
fluently is also helpful
1-8 1-8
8
Why Study Finance?
• Marketing
– Budgets, marketing research, marketing financial
products
• Accounting
– Dual accounting and finance function, preparation
of financial statements
• Management
– Strategic thinking, job performance, profitability
• Personal finance
– Budgeting, retirement planning, college planning,
day-to-day cash flow issues
1-9 1-9
9
Business Finance
• Some important questions that are
answered using finance
– What long-term investments should the firm
take on?
– Where will we get the long-term financing to
pay for the investments?
– How will we manage the everyday financial
activities of the firm?
1-10
1-10
10
Financial Manager
• Financial managers try to answer some, or
all, of these questions
• The top financial manager within a firm is
usually the Chief Financial Officer (CFO)
– Treasurer – oversees cash management, credit
management, capital expenditures, and financial
planning
– Controller – oversees taxes, cost accounting,
financial accounting, and data processing
1-11
1-11
11
Financial Management
Decisions
• Capital budgeting
– What long-term investments or projects
should the business take on?
• Capital structure
– How should we pay for our assets?
– Should we use debt or equity?
• Working capital management
– How do we manage the day-to-day
finances of the firm?
1-12
1-12
12
Forms of Business Organization
• Three major forms in the United States
– Sole proprietorship
– Partnership
• General
• Limited
– Corporation
• S-Corp
• Limited liability company
1-13
1-13
13
Sole Proprietorship
• Advantages
– Easiest to start
– Least regulated
– Single owner keeps
all of the profits
– Taxed once as
personal income
• Disadvantages
– Limited to life of owner
– Equity capital limited to
owner’s personal
wealth
– Unlimited liability
– Difficult to sell
ownership interest
1-14
1-14
14
Partnership
• Advantages
– Two or more owners
– More capital available
– Relatively easy to
start
– Income taxed once as
personal income
• Disadvantages
– Unlimited liability
• General partnership
• Limited partnership
– Partnership dissolves
when one partner dies
or wishes to sell
– Difficult to transfer
ownership
1-15
1-15
15
Corporation
• Advantages
– Limited liability
– Unlimited life
– Separation of
ownership and
management
– Transfer of ownership
is easy
– Easier to raise capital
• Disadvantages
– Separation of
ownership and
management (agency
problem)
– Double taxation
(income taxed at the
corporate rate and
then dividends taxed
at personal rate, while
dividends paid are not
tax deductible)
1-16
1-16
16
Goal Of Financial Management
• What should be the goal of a corporation?
– Maximize profit?
– Minimize costs?
– Maximize market share?
– Maximize the current value of the company’s
stock?
• Does this mean we should do anything
and everything to maximize owner wealth?
• Sarbanes-Oxley Act
1-17
1-17
17
The Agency Problem
• Agency relationship
– Principal hires an agent to represent its
interests
– Stockholders (principals) hire managers
(agents) to run the company
• Agency problem
– Conflict of interest between principal and
agent
• Management goals and agency costs
1-18
1-18
18
Managing Managers
• Managerial compensation
– Incentives can be used to align management and
stockholder interests
– The incentives need to be structured carefully to
make sure that they achieve their goal
• Corporate control
– The threat of a takeover may result in better
management
• Other stakeholders
1-19
1-19
19
Example: Work the Web
• The Internet provides a wealth of
information about individual companies
• One excellent site is finance.yahoo.com
• Click on the Web surfer to go to the site,
choose a company and see what
information you can find!
1-20
1-20
20
Figure 1.2
1-21
1-21
21
Financial Markets
• Cash flows to the firm
• Primary vs. secondary markets
– Dealer vs. auction markets
– Listed vs. over-the-counter securities
• NYSE
• NASDAQ
1-22
1-22
22
Quick Quiz
• What are the four basic areas of finance?
• What are the three types of financial
management decisions, and what questions
are they designed to answer?
• What are the three major forms of business
organization?
• What is the goal of financial management?
• What are agency problems, and why do they
exist within a corporation?

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Chandrasekaran.ppt

  • 1. 1-0 1-0 Financial Management Presented by Dr.M.Chandrasekaran 0
  • 2. Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter 1 Introduction to Financial Management
  • 3. 1-2 1-2 2 Key Concepts and Skills • Know the basic types of financial management decisions and the role of the financial manager • Know the financial implications of the different forms of business organization • Know the goal of financial management • Understand the conflicts of interest that can arise between owners and managers
  • 4. 1-3 1-3 3 Chapter Outline • Finance: A Quick Look • Business Finance and The Financial Manager • Forms of Business Organization • The Goal of Financial Management • The Agency Problem and Control of the Corporation • Financial Markets and the Corporation
  • 5. 1-4 1-4 4 Basic Areas Of Finance • Corporate finance • Investments • Financial institutions • International finance
  • 6. 1-5 1-5 5 Investments • Work with financial assets such as stocks and bonds • Value of financial assets, risk versus return, and asset allocation • Job opportunities – Stockbroker or financial advisor – Portfolio manager – Security analyst
  • 7. 1-6 1-6 6 Financial Institutions • Companies that specialize in financial matters – Banks – commercial and investment, credit unions, savings and loans – Insurance companies – Brokerage firms • Job opportunities
  • 8. 1-7 1-7 7 International Finance • This is an area of specialization within each of the areas discussed so far • It may allow you to work in other countries or at least travel on a regular basis • Need to be familiar with exchange rates and political risk • Need to understand the customs of other countries; speaking a foreign language fluently is also helpful
  • 9. 1-8 1-8 8 Why Study Finance? • Marketing – Budgets, marketing research, marketing financial products • Accounting – Dual accounting and finance function, preparation of financial statements • Management – Strategic thinking, job performance, profitability • Personal finance – Budgeting, retirement planning, college planning, day-to-day cash flow issues
  • 10. 1-9 1-9 9 Business Finance • Some important questions that are answered using finance – What long-term investments should the firm take on? – Where will we get the long-term financing to pay for the investments? – How will we manage the everyday financial activities of the firm?
  • 11. 1-10 1-10 10 Financial Manager • Financial managers try to answer some, or all, of these questions • The top financial manager within a firm is usually the Chief Financial Officer (CFO) – Treasurer – oversees cash management, credit management, capital expenditures, and financial planning – Controller – oversees taxes, cost accounting, financial accounting, and data processing
  • 12. 1-11 1-11 11 Financial Management Decisions • Capital budgeting – What long-term investments or projects should the business take on? • Capital structure – How should we pay for our assets? – Should we use debt or equity? • Working capital management – How do we manage the day-to-day finances of the firm?
  • 13. 1-12 1-12 12 Forms of Business Organization • Three major forms in the United States – Sole proprietorship – Partnership • General • Limited – Corporation • S-Corp • Limited liability company
  • 14. 1-13 1-13 13 Sole Proprietorship • Advantages – Easiest to start – Least regulated – Single owner keeps all of the profits – Taxed once as personal income • Disadvantages – Limited to life of owner – Equity capital limited to owner’s personal wealth – Unlimited liability – Difficult to sell ownership interest
  • 15. 1-14 1-14 14 Partnership • Advantages – Two or more owners – More capital available – Relatively easy to start – Income taxed once as personal income • Disadvantages – Unlimited liability • General partnership • Limited partnership – Partnership dissolves when one partner dies or wishes to sell – Difficult to transfer ownership
  • 16. 1-15 1-15 15 Corporation • Advantages – Limited liability – Unlimited life – Separation of ownership and management – Transfer of ownership is easy – Easier to raise capital • Disadvantages – Separation of ownership and management (agency problem) – Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible)
  • 17. 1-16 1-16 16 Goal Of Financial Management • What should be the goal of a corporation? – Maximize profit? – Minimize costs? – Maximize market share? – Maximize the current value of the company’s stock? • Does this mean we should do anything and everything to maximize owner wealth? • Sarbanes-Oxley Act
  • 18. 1-17 1-17 17 The Agency Problem • Agency relationship – Principal hires an agent to represent its interests – Stockholders (principals) hire managers (agents) to run the company • Agency problem – Conflict of interest between principal and agent • Management goals and agency costs
  • 19. 1-18 1-18 18 Managing Managers • Managerial compensation – Incentives can be used to align management and stockholder interests – The incentives need to be structured carefully to make sure that they achieve their goal • Corporate control – The threat of a takeover may result in better management • Other stakeholders
  • 20. 1-19 1-19 19 Example: Work the Web • The Internet provides a wealth of information about individual companies • One excellent site is finance.yahoo.com • Click on the Web surfer to go to the site, choose a company and see what information you can find!
  • 22. 1-21 1-21 21 Financial Markets • Cash flows to the firm • Primary vs. secondary markets – Dealer vs. auction markets – Listed vs. over-the-counter securities • NYSE • NASDAQ
  • 23. 1-22 1-22 22 Quick Quiz • What are the four basic areas of finance? • What are the three types of financial management decisions, and what questions are they designed to answer? • What are the three major forms of business organization? • What is the goal of financial management? • What are agency problems, and why do they exist within a corporation?