FOUNDATIONS OF FINANCIAL MANAGEMENT

Ohio UniversityCollege of Business

How do we learn?

There are primarily seven ways

How do we learn?

1. Discussion2. Practice doing3. Reading4. Lecture5. Audiovisual6. Teach others7. Demonstration

What do you think of when someone says “finance”?

We need money to live (food, clothing, shelter) and we probably want money for a great number of things (concert tickets, cars, computers, etc.). 

Run your own firm - how to invest and how to raise money. 

Teaches us to understand the other side of every transaction.  If you understand what your employer wants, it is easier to achieve this and hence you are in a better position for raises and promotions. 

Why is finance important personally?

Few people will not work their entire life at the same firm.  Knowing in advance your financial position and options dramatically reduces your stress in this time of change. 

Taxes can take 40% of what we earn.  Making the right investments can cut this tax burden. 

Star athletes have gone from making millions to flat broke. 

Why is finance important personally?

US Fiscal Condition

United States Tax revenue: $2,170,000,000,000Fed budget: $3,820,000,000,000New debt: $1,650,000,000,000National debt: $14,271,000,000,000Recent budget cut: $38,500,000,000

Make the #s relevant

Annual family income: $21,700Money the family spent: $38,200New debt on the credit card: $16,500Outstanding balance on credit card: $142,710Total budget cuts: $385http://www.youtube.com/watch?v=Li0no7O9zmE

How is Finance related to other fields? 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

Daniel Pink – Does $ Increase Performance?

http://www.youtube.com/watch?v=u6XAPnuFjJc

Finance: The Art and Science of Managing Money

Finance Utilizes?

Economics Accounting

Financial analysis is like a…

Analyst’s opinion of GM

Dec 07

Strong Buy 4

Buy 3

Hold 7

Underperform 3

Sell 1

What do you see?

What do you see?

What do you see?

Count every “F” below?

FINISHED FILES ARE THE RE SULT OF YEARS OF SCIENTI FIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS...

What number goes in the triangle?

Organizations that hire Finance Grads

Banks Insurance Companies Any Large Business Investment Bankers Stockbrokers

Careers in Finance

Commercial Banking

Financial Planning Insurance Real Estate Money

Management Corporate Finance

Overview of Semester

Intro to Finance Accounting Review Financial Statement Analysis Time Value of Money Capital Budgeting Stock and Bond Valuation

CHAPTER 1AN OVERVIEW OF FINANCIAL MANAGEMENT

Forms of Businesses Goals of the Corporation Agency Relationships Ethics in Finance

Key Concepts and Skills

Have a good understanding of: The basic types of financial

management decisions and the role of the financial manager

The goal of financial management The financial implications of the

different forms of business organization

The conflicts of interest that can arise between owners and managers

Basic Areas Of Finance

1. Corporate finance = Business Finance2. Investments3. Financial institutions4. International finance

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

Financial Institutions

Companies that specialize in financial matters Banks – commercial and investment, credit

unions, savings and loans Insurance companies Brokerage firms

Job opportunities

International Finance

An area of specialization within each of the areas discussed so far

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

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

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?

Financial Manager

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

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? Financial managers try to answer some, or

all, of these questions

Forms of Business Organization

Three major forms in the United StatesSole proprietorshipPartnership

GeneralLimited

CorporationS-CorpLimited liability company (LLC)

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

Business owned by one person

Partnership

Advantages Two or more

owners More capital

available Relatively easy to

start Income taxed once

as personal income

Disadvantages Unlimited liability Partnership

dissolves when one partner dies or wishes to sell

Difficult to transfer ownership

Business owned by two or more persons

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)

A legal “person” distinct from owners and a resident of a state

International Corporate Forms All of these forms feature public

ownership and limited liability

Financial Goals of the Corporation

The primary financial goal is _______________.

Goal Of Financial Management What should be the goal of a

corporation? Maximize the market value of the

existing owners’ equity Maximize the current value per share

of the company’s existing stock

Goal Of Financial Management Does this mean we should do

anything and everything to maximize owner wealth? Outsourcing? Off-shoring? Enron? Corporate support of charities?http://globalpublicsquare.blogs.cnn.com/2012/09/27/why-outsourcing-shouldnt-be-a-dirty-word/

Why not maximize profits?

Is stock price maximization the same as profit maximization?

No, despite a generally high correlation amongst stock price, EPS, and cash flow.

Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa).

The goal of the financial manager is to maximize the value of the firm.

What determines a firm’s value? A firm’s value is the present value of all

future cash flows.

Market Capitalizations

AFLAC Inc.Apple Inc.Best Buy Co., Inc.Exxon Mobil CorporationFord Motor Co.Google Inc.Microsoft CorporationStarbucks CorporationWal-Mart Stores Inc.

Apple Inc. 481BExxon Mobil 429BGoogle Inc. 375BMicrosoft Corporation

293B

Wal-Mart Stores Inc.

250B

Ford Motor Co. 63BStarbucks Corporation

56B

AFLAC Inc. 30BBest Buy Co., Inc. 12B

What is Ethical Behavior?

Ethical behavior tends to be good for business and involves demonstrating respect for key moral principles that include honesty, fairness, equality, dignity, diversity and individual rights.

Agency relationships

An agency relationship exists whenever a principal hires an agent to act on their behalf.

Agency relationships

An agency relationship exists whenever a principal hires an agent to act on their behalf.

Within a corporation, agency relationships exist between: Shareholders and managers

Shareholders versus Managers Managers are naturally inclined to act in

their own best interests. But the following factors affect

managerial behavior: Stock option plans The threat of firing (Board of Directors,

large stockholder, other managers) The threat of takeover

There's No Such Thing As "Business" Ethics : There's Only One Rule for Making Decisions

Sarbanes-Oxley Act of 2002

Major focus is to make sure that publicly-traded corporations accurately present their financial statements.

Longer jail sentences Made CEOs responsible for the fin. stmts.

Sarbanes-Oxley Act

Driven by corporate scandals Enron, Tyco, WorldCom, Adelphia

Intended to strengthen protection against accounting fraud and financial malpractice

Compliance very costly Firms driven to:

Go public outside the U.S.Go private (“go dark”)