Overview of Managerial Finance
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Transcript of Overview of Managerial Finance
7/21/2019 Overview of Managerial Finance
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An Overview of Managerial
Finance
7/21/2019 Overview of Managerial Finance
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What is Finance?
Finance is concerned with decisions about
money (Cash Flows)
Finance decisions deal with how money is
raised and usedEverything else being eual!
More value is "referred to less
#he sooner cash is received the more value it has
$ess ris%y assets are more valuable than ris%ier
assets
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&eneral Areas of FinanceFinancial Mar%ets and 'nstitutionsan%s 'nsurance Com"anies *aving + $oans Credit ,nions etc-
'nvestments *toc% ro%erage .rms Financial 'nstitutions 'nvestment Com"anies 'nsurance
Com"anies etc-
Financial *ervicesFinancial Consultants Auditing Firms etc
Managerial FinanceAll ty"e of Firms ma%ing Financial /ecisions concerning cash 0ows-
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Managerial Finance #he ty"es of duties encountered in managerial
.nance!
ma%ing decisions about "lant e1"ansions to
choosing what ty"es of securities to issue to
.nance such e1"ansions-deciding the credit terms under which customers
can buy how much inventory the .rm should
carry how much cash to %ee" on hand whether
to acuire other .rms (merger analysis) and howmuch of the .rm2s earnings to reinvest in the
business and how much to "ay out as dividends-
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FINANCE IN NONFINANCE AREAS
Management *trategic "lanning cannot be accom"lished without
considering how such "lans im"act the overall .nancial well3
being of the .rm-
4ersonnel decisions as setting salaries hiring new sta5 and
"aying bonuses must be coordinated with .nancial decisions
to ensure that any needed funds are available-
Mar%eting Four 4s of mar%eting6"roduct "rice "lace and "romotion6
determine the success of "roducts- Clearly the "rice that
should be charged for a "roduct and the amount of
advertising a .rm can a5ord for the "roduct must be
determined in consultation with .nancial managers-
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FINANCE IN NONFINANCE AREAS(Cont.)
Accounting Financial managers rely heavily on accounting information
because ma%ing decisions about the future reuires
information about the "ast- As a conseuence accountants
must understand how .nancial managers use accounting
information in "lanning and decision ma%ing so that it can
be "rovided in an accurate and timely fashion-
Information Systems information system s"ecialists wor% with .nancial managers
to determine what information is needed how it should be
stored how it should be delivered-
Economicseconomic activity and "olicy im"act .nancial decisions and
vice versa
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Finance in the Organi7ational*tructure of the Firm
Board of Directors
President (CEO)
Treasurer ControllerCredit
Manager
Inventory
Manager
Director of Capital
Budgeting
Financialand Cost
Accounting
Ta
Depart!ent
"ice#President$
Finance (CFO)
"ice#President$
%ales
"ice#President$
Infor!ation %yste!s (CIO)
"ice#President$
Operations (COO)
•Manage cash & Marketable Securities•Plan how the firm is finance
•Manage !isk•"#ersee $ension fun
• %cti#it of accounting an ta'
e$artment
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Alternative Forms ofusiness Organi7ation
4ro"rietorshi"
4artnershi"
Cor"oration
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4ro"rietorshi"
Advantages!
Ease of formation
*ub8ect to few government regulations
9o cor"orate income ta1es
$imitations!
,nlimited "ersonal liability
$imited life #ransferring ownershi" is di:cult
/i:cult to raise ca"ital
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4artnershi"
$i%e a "ro"rietorshi" e1ce"t two or
more owners
A "artnershi" has roughly thesame advantages and limitations
as a "ro"rietorshi"
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Cor"oration
Advantages!
,nlimited life
Easy transfer of ownershi"
$imited liability
Ease of raising ca"ital
/isadvantages!
Cost of set3u" and re"ort .ling/ouble ta1ation
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;ybrid Forms of usiness
$imited $iability 4artnershi" ($$4) A
"artnershi" wherein one (or more) "artner is designated the
general partner(s) with unlimited "ersonal .nancial liability and
the other "artners are limited "artners whose liability is limited
to amounts they invest in the .rm-
$imited $iability Com"any ($$C) O5ers the
limited "ersonal liability associated with a cor"oration but the
com"any2s income is ta1ed li%e a "artnershi"
* Cor"oration A cor"oration with no more than <=
stoc%holders that elects to be ta1ed the same as "ro"rietorshi"s
and "artnershi"s so that business income is ta1ed only once-
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usiness Organi7ed as aCor"oration! >alue Ma1imi7ed
$imited liability reduces ris% increasing
mar%et value
Ease of raising ca"ital allows ta%ing
advantage of growth o""ortunities
Ownershi" can be easily transferred
thus investors would be willing to "ay
more for a cor"oration
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&oals of the Cor"oration
4rimary goal!stockholder ealthma!imi"ation#translates to
ma1imi7ing stoc% "rice-
Managerial incentives4rovide valuable incentives to %ee" the interest of management alive
and inline with stoc%holder wealth ma1imi7ation-
*ocial res"onsibility #he conce"t that businesses should be actively concerned with the
welfare of society at large-
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&oal of stoc% "rice ma1imi7ation! is thisgood or is this bad for society?
it is good- First stoc% "rice ma1imi7ation reuires e:cient low3
cost "lants that "roduce high uality goods and services
that are sold at the lowest "ossible "rices- *econd stoc% "rice ma1imi7ation reuires the
develo"ment of "roducts that consumers want and
need so the "ro.t motive leads to new technology new
"roducts and new 8obs-
Finally stoc% "rice ma1imi7ation necessitates e:cientand courteous service adeuate stoc%s of merchandise
and well3located business establishments-
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Managerial Actions toMa1imi7e *toc%holder Wealth
Ca"ital *tructure /ecisions/ecision about how much and what ty"es of debt and euity
should be used to .nance the .rm-
Ca"ital udgeting /ecisions/ecision as to what ty"es of assets should be "urchased to
hel" generate future cash 0ows-
/ividend 4olicy /ecisions/ecisions as to how much of current earnings to "ay out as
dividends rather than to retain for reinvestment in the .rm-
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>alue of the FirmMar%et FactorsConsiderations
Economic Conditions&overnment @egulations and @ulesCom"etitive Environment
Firm FactorsConsiderations 9ormal O"erations (@evenues and
E1"enses)
Financing 4olicy (Ca"ital *tructure)
'nvesting 4olicy (Ca"ital udgeting)
/ividend 4olicy
'nvestor FactorsConsiderations'ncome*avingsAge$ifestyle'nterest @ates@is% Attitude
Net Cash Flos$ CF Rates of Return$ r
= CF 1
(1+ r )1+ CF 2
(1+ r )2+ ...+
CF N
(1+ r ) N =
N
Σ
t =1
CF t
(1+ r )t
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Factors 'n0uenced by Managers
that A5ect *toc% 4rice4ro8ected earnings "er share
#iming of earnings streams
@is% of "ro8ected earnings
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Agency @elationshi"s
An agency relationshi" e1ists whenever a"rinci"al hires an agent to act on his or her
behalf-
An agency "roblem results when the agent
ma%es decisions that are not in the best
interest of "rinci"als-
#wo ty"es of Agency @elationshi"!
*toc%holders >s- Managers *toc%holders >s- Creditors
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*toc%holders versus ManagersManagers are naturally inclined to act in their own
best interests-
Mechanisms to motivate managers to act in
shareholder2s best interest
Managerial com"ensation (incentives)
4erformance shares awarded on basis of E4* e1ecutivestoc% "urchased at future time at given "rice restricted
stoc% grants to em"loyees for some time in future-
B- 4erformance share
- E1ecutive stoc% o"tion! An incentive "lan that
allows the managers to "urchase stoc% at some future time at agiven "rice-
D- @estricted stoc% grants! *toc% is granted to
em"loyees based on "erformance but does not have the right to
ownershi" of the stoc% untill some "eriod in the future-
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*toc%holders versus ManagersCont-
#he threat of .ring4ossible now due to ownershi" by few large institutions li%e
"ension fund mutual funds etc-
*hareholder interventionig Funds now closely monitor .rms and in0uence
management decisions when ever needed-
#hreat of ta%eover ;ostile ta%eovers management is .red-
4oison "ill
&reen Mail
**
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*toc%holders >s- Creditors
*toc%holders through management cause
the .rm to ta%e new ventures that have
much greater ris% than the creditors
antici"ated- #hat causes the value of
outstanding debt to fall- 'f the venture
become successful all bene.ts will go to
stoc%holders- 'f things go wrong thebondholders will have to share the losses-
*3
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usiness Ethics
Webster! A standard of conduct
and moral behavior-G
usiness Ethics! A com"any2s
attitude and conduct toward its
em"loyees customerscommunity and stoc%holders
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's being ethicalG good for "ro.t and .rm
value? #here is a "ositive correlation between
ethics and long3run "ro.tability because
ethical behavior (B) "revents .nes and legal e1"enses
() builds "ublic trust (D) attracts business from customers who a""reciate
and su""ort ethical "olicies
(H) attracts and %ee"s em"loyees of the highest
caliber (=) su""orts the economic viability of the communities
where these .rms o"erate-
*5
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Cor"orate &overnance
#he set of rules2 that a .rm follows
when conducting business
&ood cor"orate governance generates
higher returns to stakeholders #hose who are associated with a businessI
sta%eholders include mangers em"loyees
customers su""liers creditors stoc%holders and
other "arties with an interest in the .rm-
*6
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B- #o see% new mar%ets
- #o see% raw materials
D- #o see% new technology
H- #o see% "roduction e:ciency
=-
#o avoid "olitical and regulatoryhurdles
Fi%e reasons &rms go “international”
Multinational Cor"orations
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Factors /istinguishing /omesticFirms from Multinational Firms
/i5erent currency denominations
Economic and legal di5erences
$anguage di5erences
Cultural di5erences
@ole of governments4olitical ris%
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Cha"ter B Essentials
What is .nance?
Finance deals with decisions about money
What are the forms of business organi7ation?
4ro"rietorshi" "artnershi" cor"orationWhat goals should .rms "ursue?
Ma1imi7e stoc%holder2s wealth
What is the role of ethics in business?
Ethical .rmsG surviveI non3ethical .rmsG donot
3)
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#han% you