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    Topic1. PPT. Introduction To Financial Management 1

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    JOSCEL SYJONGTIAN
    The document introduces various topics in corporate finance, including the three basic areas of finance (financial management, financial markets, investments), the four types of financial management decisions and questions they address, forms of business organization (sole proprietorship, partnership, corporation), agency problems that can exist within corporations, and the difference between stock price and intrinsic value. Financial managers such as the CFO and treasurer are responsible for helping answer questions around capital budgeting, capital structure, working capital management, and dividend policy. The goal of financial management is maximizing the current value of the company's stock while avoiding actions that reduce long-term intrinsic value.

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    Topic1. PPT. Introduction To Financial Management 1

    Uploaded by

    JOSCEL SYJONGTIAN
    44 views17 pages
    The document introduces various topics in corporate finance, including the three basic areas of finance (financial management, financial markets, investments), the four types of financial management decisions and questions they address, forms of business organization (sole proprietorship, partnership, corporation), agency problems that can exist within corporations, and the difference between stock price and intrinsic value. Financial managers such as the CFO and treasurer are responsible for helping answer questions around capital budgeting, capital structure, working capital management, and dividend policy. The goal of financial management is maximizing the current value of the company's stock while avoiding actions that reduce long-term intrinsic value.

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    Topic1. PPT. Introduction to Financial Management 1

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    The document introduces various topics in corporate finance, including the three basic areas of finance (financial management, financial markets, investments), the four types of financial management decisions and questions they address, forms of business organization (sole proprietorship, partnership, corporation), agency problems that can exist within corporations, and the difference between stock price and intrinsic value. Financial managers such as the CFO and treasurer are responsible for helping answer questions around capital budgeting, capital structure, working capital management, and dividend policy. The goal of financial management is maximizing the current value of the company's stock while avoiding actions that reduce long-term intrinsic value.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    44 views17 pages

    Topic1. PPT. Introduction To Financial Management 1

    Uploaded by

    JOSCEL SYJONGTIAN
    The document introduces various topics in corporate finance, including the three basic areas of finance (financial management, financial markets, investments), the four types of financial management decisions and questions they address, forms of business organization (sole proprietorship, partnership, corporation), agency problems that can exist within corporations, and the difference between stock price and intrinsic value. Financial managers such as the CFO and treasurer are responsible for helping answer questions around capital budgeting, capital structure, working capital management, and dividend policy. The goal of financial management is maximizing the current value of the company's stock while avoiding actions that reduce long-term intrinsic value.

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    1-0 1-0

    Topic 1

    Introduction to
    Financial
    Management
    1-1 1-1

    Objectives:
    • What are the three basic areas of finance?
    • What are the four types of financial management
    decisions, and what questions are they designed
    to answer?
    • Who are the financial managers?
    • What is the goal of financial management?
    • What are the three major forms of business
    organization?
    • What are agency problems, and why do they
    exist within a corporation?
    • How do stock price and intrinsic value differ?
    1
    1-2 1-2

    Basic Areas Of Finance


    • Financial Management (Corporate Finance)
    • Financial Markets
    • Investments

    2
    1-3 1-3

    Financial Management
    Decisions
    • Capital budgeting (Investment)
    – What long-term investments or projects should the
    business take on?
    • Capital structure (Financing)
    – 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?
    • Dividend Policy
    – Should the firm retain all profits or distribute all
    profits or retain a portion and distribute the
    balance?

    3
    1-4 1-4

    Finance Within the Organization


    Board of Directors

    Chief Executive Officer (CEO)

    Chief Operating Officer (COO) Chief Financial Officer (CFO)

    Marketing, Production, Human Accounting, Treasury, Credit,


    Resources, and Other Operating Legal, Capital Budgeting, and
    Departments Investor Relations

    4
    1-5 1-5

    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

    5
    1-6 1-6

    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?

    6
    1-7 1-7

    Forms of Business Organization


    • Three major forms in the United States
    – Sole proprietorship
    – Partnership
    • General
    • Limited
    – Corporation

    7
    1-8 1-8

    Sole Proprietorship

    • Advantages • Disadvantages
    – Easiest to start – Limited to life of owner
    – Least regulated – Equity capital limited to
    – Single owner keeps owner’s personal
    all of the profits wealth
    – Taxed once as – Unlimited liability
    personal income – Difficult to sell
    ownership interest

    8
    1-9 1-9

    Partnership

    • Advantages • Disadvantages
    – Two or more owners – Unlimited liability
    – More capital available • General partnership
    • Limited partnership
    – Relatively easy to
    start – Partnership dissolves
    – Income taxed once as when one partner dies
    personal income or wishes to sell
    – Difficult to transfer
    ownership

    9
    1-10
    1-10

    Corporation
    • Advantages • Disadvantages
    – Limited liability – Separation of
    – Unlimited life ownership and
    – Separation of management (agency
    ownership and problem)
    management – “Double taxation”
    – Transfer of ownership (income taxed at the
    is easy corporate rate and
    then dividends taxed
    – Easier to raise capital at personal rate, while
    dividends paid are not
    tax deductible)

    10
    1-11
    1-11

    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

    11
    1-12
    1-12

    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

    12
    1-13
    1-13

    Stock Price and Intrinsic Value


    • In equilibrium, a stock’s price should
    equal its “true” or intrinsic value.
    • Intrinsic value is a long-run concept.
    • To the extent that investor perceptions are
    incorrect, a stock’s price in the short run
    may deviate from its intrinsic value.
    • Ideally, managers should avoid actions
    that reduce intrinsic value, even if those
    decisions increase the stock price in the
    short run.

    13
    1-14
    1-14
    Determinants of Intrinsic Values
    and Stock Prices
    Managerial Actions, the Economic
    Environment, Taxes, and the Political Climate

    “True” Investor “True” “Perceived” Investor “Perceived”


    Cash Flows Risk Cash Flows Risk

    Stock’s Stock’s
    Intrinsic Value Market Price

    Market Equilibrium:
    Intrinsic Value = Stock Price
    • When the stock’s market price is higher than its intrinsic value, the
    stock is said to be overvalued; and it is a good decision to sell the stock.
    • When the stock’s market price is lower than its intrinsic value, the stock
    is said to be undervalued; and it is a good decision to buy the stock.
    14
    1-15
    1-15

    Figure 1.2

    15
    1-16
    1-16

    Quick Quiz
    • What are the three basic areas of finance?
    • What are the four types of financial management
    decisions, and what questions are they designed
    to answer?
    • Who are the financial managers?
    • What is the goal of financial management?
    • What are the three major forms of business
    organization?
    • What are agency problems, and why do they
    exist within a corporation?
    • How do stock price and intrinsic value differ?
    16

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