Gitman Pmf13 Ppt01pinar 2
-
Upload
sinem-dilara-hasimoglu -
Category
Documents
-
view
242 -
download
0
Transcript of Gitman Pmf13 Ppt01pinar 2
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
1/36
Copyright 2012 Pearson Prentice Hall.All rights reserved.
Chapter 1
The Role ofManagerial
Finance
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
2/36
2012 Pearson Prentice Hall. All rights reserved. 1-2
Learning Goals
LG1 Definefinanceand the managerial finance function.
LG2 Describe the goal of the firm, and explain whymaximizing the value of the firm is an appropriate
goal for a business.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
3/36
2012 Pearson Prentice Hall. All rights reserved. 1-3
Learning Goals (cont.)
LG3 Describe how the managerial finance function isrelated to economics and accounting.
LG4 Identify the primary activities of the financialmanager.
LG5 Describe the nature of the principle-agent relationship
between the owners and managers of a corporation,and explain how various corporate governance
mechanisms attempt to manage agency problems.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
4/36
2012 Pearson Prentice Hall. All rights reserved. 1-4
What is Finance?
Financecan be defined as the science and art of managingmoney.
At the personal level, finance is concerned with
individualsdecisions about how much of their earningsthey spend, how much they save, and how they invest
their savings.
In a business context, finance involves the same types of
decisions: how firms raise money from investors, howfirms invest money in an attempt to earn a profit, and howthey decide whether to reinvest profits in the business ordistribute them back to investors.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
5/36
2012 Pearson Prentice Hall. All rights reserved. 1-5
Career Opportunities inFinance: Financial Services
Financial Servicesis the area of finance concerned with
the design and delivery of advice and financial products
to individuals, businesses, and governments.
Career opportunities include banking, personal financialplanning, investments, real estate, and insurance.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
6/36
2012 Pearson Prentice Hall. All rights reserved. 1-6
Career Opportunities inFinance: Managerial Finance
Managerial financeis concerned with the duties of the
financial manager working in a business.
Financial managersadminister the financial affairs of all
types of businessesprivate and public, large and small,profit-seeking and not-for-profit.
They perform such varied tasks as developing a financial
plan or budget, extending credit to customers, evaluatingproposed large expenditures, and raising money to fund
the firms operations.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
7/36 2012 Pearson Prentice Hall. All rights reserved. 1-7
Career Opportunities in Finance:
Managerial Finance (cont.)
The recent global financial crisis and subsequent
responses by governmental regulators, increased global
competition, and rapid technological change also increase
the importance and complexity of the financial managersduties.
Increasing globalization has increased demand for
financial experts who can manage cash flows in different
currencies and protect against the risks that naturally arisefrom international transactions.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
8/36 2012 Pearson Prentice Hall. All rights reserved. 1-8
Table 1.2 Career Opportunitiesin Managerial Finance
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
9/36 2012 Pearson Prentice Hall. All rights reserved. 1-9
Goal of the Firm:Maximize Shareholder Wealth
Decision rule for managers: only take actions that are
expected to increase the share price.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
10/36 2012 Pearson Prentice Hall. All rights reserved. 1-10
Goal of the Firm:Maximize Profit?
Profit maximization may not lead to the highest possible share pricefor at least three reasons:
1. Timing is importantthe receipt of funds sooner rather than later is preferred
2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk
Which Investment is Preferred?
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
11/36 2012 Pearson Prentice Hall. All rights reserved. 1-11
Goal of the Firm:What About Stakeholders?
Stakeholdersare groups such as employees, customers,
suppliers, creditors, owners, and others who have a direct
economic link to the firm.
A firm with astakeholder focusconsciously avoidsactions that would prove detrimental to stakeholders. The
goal is not to maximize stakeholder well-being but to
preserve it.
Such a view is considered to be "socially responsible."
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
12/36
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
13/36 2012 Pearson Prentice Hall. All rights reserved. 1-13
Managerial Finance Function
The size and importance of the managerial finance
function depends on the size of the firm.
In small firms, the finance function is generally
performed by the accounting department.
As a firm grows, the finance function typically evolves
into a separate department linked directly to the company
president or CEO through the chief financial officer(CFO) (see Figure 1.1)
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
14/36 2012 Pearson Prentice Hall. All rights reserved. 1-14
Figure 1.1 CorporateOrganization
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
15/36
2012 Pearson Prentice Hall. All rights reserved. 1-15
Managerial Finance Function:Relationship to Economics
The field of finance is closely related to economics.
Financial managers must understand the economic
framework and be alert to the consequences of varying
levels of economic activity and changes in economicpolicy.
They must also be able to use economic theories as
guidelines for efficient business operation.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
16/36
2012 Pearson Prentice Hall. All rights reserved. 1-16
Managerial Finance Function:
Relationship to Economics (cont.)
Marginal costbenefit analysis is the economic principle
that states that financial decisions should be made and
actions taken only when the added benefits exceed the
added costs Marginal cost-benefit analysis can be illustrated using the
following simple example.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
17/36
2012 Pearson Prentice Hall. All rights reserved. 1-17
Managerial Finance Function:
Relationship to Economics (cont.)
Nord Department Stores is applying marginal-cost benefit
analysis to decide whether to replace a computer:
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
18/36
2012 Pearson Prentice Hall. All rights reserved. 1-18
Managerial Finance Function:Relationship to Accounting
The firms finance and accounting activities are closely-
related and generally overlap.
In small firms accountants often carry out the finance
function, and in large firms financial analysts often helpcompile accounting information.
One major difference in perspective and emphasis
between finance and accounting is that accountantsgenerally use the accrual method while in finance, the
focus is on cash flows.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
19/36
2012 Pearson Prentice Hall. All rights reserved. 1-19
Managerial Finance Function:
Relationship to Accounting (cont.)
Whether a firm earns a profit or experiences a loss, it must
have a sufficient flow of cash to meet its obligations as
they come due.
The significance of this difference can be illustrated usingthe following simple example.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
20/36
2012 Pearson Prentice Hall. All rights reserved. 1-20
Managerial Finance Function:
Relationship to Accounting (cont.)
The Nassau Corporation experienced the following activity
last year:
Sales $100,000 (1 yacht sold, 100% stilluncollected)
Costs $ 80,000 (all paid in full under supplierterms)
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
21/36
2012 Pearson Prentice Hall. All rights reserved. 1-21
Managerial Finance Function:
Relationship to Accounting (cont.)
Now contrast the differences in performance under the
accounting method (accrual basis) versus the financial view
(cash basis):
Income Statement Summary
Accrual basis Cash basis
Sales $100,000 $ 0
Less: Costs (80,000) (80,000)
Net Profit/(Loss) $ 20,000 $(80,000)
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
22/36
2012 Pearson Prentice Hall. All rights reserved. 1-22
Managerial Finance Function:
Relationship to Accounting (cont.)
Finance and accounting also differ with respect to decision-
making:
Accountants devote most of their attention to the collection and
presentation of financial data. Financial managers evaluate the accounting statements, develop
additional data, and make decisionson the basis of their
assessment of the associated returns and risks.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
23/36
2012 Pearson Prentice Hall. All rights reserved. 1-23
Personal Finance Example
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
24/36
2012 Pearson Prentice Hall. All rights reserved. 1-24
Figure 1.3Financial Activities
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
25/36
2012 Pearson Prentice Hall. All rights reserved. 1-25
Governance and Agency:Corporate Governance
Corporate governancerefers to the rules, processes, and
laws by which companies are operated, controlled, and
regulated.
It defines the rights and responsibilities of the corporateparticipants such as the shareholders, board of directors,
officers and managers, and other stakeholders, as well as
the rules and procedures for making corporate decisions.
The structure of corporate governance was previously
described in Figure 1.1.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
26/36
2012 Pearson Prentice Hall. All rights reserved. 1-26
Governance and Agency:Individual versus Institutional Investors
Individual investorsare investors who own relatively smallquantities of shares so as to meet personal investment goals.
Institutional investorsare investment professionals, such as banks,
insurance companies, mutual funds, and pension funds, that are paid
to manage and hold large quantities of securities on behalf of others.
Unlike individual investors, institutional investors often monitor and
directly influence a firms corporate governance by exerting pressure
on management to perform or communicating their concerns to the
firms board.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
27/36
2012 Pearson Prentice Hall. All rights reserved. 1-27
Governance and Agency:Government Regulation
Government regulation generally shapes the corporate
governance of all firms.
During the recent decade, corporate governance has
received increased attention due to several high-profilecorporate scandals involving abuse of corporate power
and, in some cases, alleged criminal activity by corporate
officers.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
28/36
2012 Pearson Prentice Hall. All rights reserved. 1-28
Governance and Agency:The Agency Issue
A principal-agent relationshipis an arrangement in
which an agent acts on the behalf of a principal. For
example, shareholders of a company (principals) elect
management (agents) to act on their behalf. Agency problemsarise when managers place personal
goals ahead of the goals of shareholders.
Agency costsarise from agency problems that are borne
by shareholders and represent a loss of shareholder
wealth.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
29/36
2012 Pearson Prentice Hall. All rights reserved. 1-29
The Agency Issue:
Management Compensation Plans
In addition to the roles played by corporate boards,
institutional investors, and government regulations,
corporate governance can be strengthened by ensuring
that managersinterests are aligned with those ofshareholders.
A common approach is to structure management
compensation to correspond with firm performance.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
30/36
2012 Pearson Prentice Hall. All rights reserved. 1-30
The Agency Issue:
Management Compensation Plans
Incentive plansare management compensation plans that
tie management compensation to share price; one example
involves the granting of stock options.
Performance planstie management compensation tomeasures such as EPS or growth in EPS. Performance
shares and/or cash bonuses are used as compensation
under these plans.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
31/36
2012 Pearson Prentice Hall. All rights reserved. 1-31
Matter of FactForbes.comCEO Performance vs. Pay
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
32/36
2012 Pearson Prentice Hall. All rights reserved. 1-32
The Agency Issue: The Threatof Takeover
When a firms internal corporate governance structure is
unable to keep agency problems in check, it is likely that
rival managers will try to gain control of the firm.
The threat of takeover by another firm, which believes itcan enhance the troubled firms value by restructuring its
management, operations, and financing, can provide a
strong source of external corporate governance.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
33/36
2012 Pearson Prentice Hall. All rights reserved. 1-33
Review of Learning Goals
LG1 Definefinanceand the managerial finance function.
Financeis the science and art of managing money.Managerial financeis concerned with the duties of thefinancial manager working in a business.
LG2 Describe the goal of the firm, and explain whymaximizing the value of the firm is an appropriategoal for a business.
The goal of the firm is maximize its value, and therefore thewealth of its shareholders. Maximizing the value of the firmmeans running the business in the interest of those who ownitthe shareholders.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
34/36
2012 Pearson Prentice Hall. All rights reserved. 1-34
Review of Learning Goals(cont.)
LG3 Describe how the managerial finance function is related toeconomics and accounting.
The financial manager must understand the economic environment and
rely heavily on the economic principle of marginal costbenefit analysis
to make financial decisions. Financial managers use accounting butconcentrate on cash flows and decision making.
LG4 Identify the primary activities of the financial manager.
The primary activities of the financial manager, in addition to ongoing
involvement in financial analysis and planning, are making investmentdecisions and making financing decisions.
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
35/36
2012 Pearson Prentice Hall. All rights reserved. 1-35
Review of Learning Goals(cont.)
LG5 Describe the nature of the principle-agent relationship betweenthe owners and managers of a corporation, and explain how
various corporate governance mechanisms attempt to manage
agency problems.
This separation of owners and managers of the typical firm isrepresentative of the classic principal-agent relationship, where the
shareholders are the principles and mangers are the agents. A firms
corporate governance structure is intended to help ensure that managers
act in the best interests of the firms shareholders, and other
stakeholders, and it is usually influenced by both internal and externalfactors.
Ch R
-
8/12/2019 Gitman Pmf13 Ppt01pinar 2
36/36
Chapter Resources onMyFinanceLab
Chapter Cases
Group Exercises
Critical Thinking Problems