1-1
After studying Chapter 1, you should be able to:
1. 2. 3.
4.
5. 6. 7.
1-2
Explain why the role of the financial manager today is so important. Describe "financial management" in terms of the three major decision areas that confront the financial manager. Identify the goal of the firm and understand why shareholders' wealth maximization is preferred over other goals. Understand the potential problems arising when management of the corporation and ownership are separated (i.e., agency problems). Demonstrate an understanding of corporate governance. Discuss the issues underlying social responsibility of the firm. Understand the basic responsibilities of financial managers and the differences between a "treasurer" and a "controller."
The Role of Financial Management
?
?
What is Financial Management?
The Goal of the Firm
?
?
Corporate Governance
Organization of the Financial Management Function
1-3
What is Financial Management?
Concerns the acquisition, financing, and management of assets with some overall goal in mind.
1-4
Investment Decisions
Most important of the three decisions.
?
What is the optimal firm size?
?
What specific assets should be acquired? What assets (if any) should be reduced or eliminated?
?
1-5
Financing Decisions
Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). ? What is the best type of financing? ? What is the best financing mix? ? What is the best dividend policy (e.g., dividend-payout ratio)? ? How will the funds be physically acquired?
1-6
Asset Management Decisions
? How
do we manage existing assets efficiently?
Manager has varying degrees of operating responsibility over assets. emphasis on current asset management than fixed asset management.
? Financial
? Greater
1-7
What is the Goal of the Firm?
Maximization of Shareholder Wealth!
Value creation occurs when we maximize the share price for current shareholders.
1-8
Shortcomings of Alternative Perspectives
Profit Maximization
?Maximizing
a firm’s earnings after taxes.
Problems
?
Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.). Ignores changes in the risk level of the firm.
?
1-9
Shortcomings of Alternative Perspectives
Earnings per Share Maximization
?Maximizing
earnings after taxes divided by shares outstanding.
Does not specify timing or duration of expected returns.
Problems
?
? Ignores
?
1-10
changes in the risk level of the firm.
Calls for a zero payout dividend policy.
Strengths of Shareholder Wealth Maximization
?Takes
account of: current and future profits and EPS; the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors.
share price serves as a barometer for business performance.
?Thus,
1-11
What companies say about their corporate goal*
? Cadbury ? Credit
Schweppes: “governing objective is growth in shareowner value” Suisse Group: “achieve high customer satisfaction, maximize shareholder value and be an employer of choice” Chemical Company: “maximize long-term shareholder value”
? Dow
? ExxonMobil:
“long-term, sustainable shareholder value”
*Refer to text for additional details
1-12
The Modern Corporation
Modern Corporation
Shareholders Management
There exists a SEPARATION between owners and managers.
1-13
Role of Management
Management acts as an agent for the owners (shareholders) of the firm.
?
An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.
1-14
Agency Theory
?Jensen
and Meckling developed a theory of the firm based on agency theory.
Theory is a branch of economics relating to the behavior of principals and their agents.
?Agency
1-15
Agency Theory
?Principals
must provide incentives so that management acts in the principals’ best interests and then monitor results.
include, stock options, perquisites, and bonuses.
?Incentives
1-16
Social Responsibility
? Wealth
maximization does not preclude the firm from being socially responsible.
? Assume
we view the firm as producing both private and social goods.
shareholder wealth maximization remains the appropriate goal in governing the firm.
? Then
1-17
Corporate Governance
? Corporate
governance: represents the system by which corporations are managed and controlled.
?Includes
shareholders, board of directors, and senior management.
? Then
shareholder wealth maximization remains the appropriate goal in governing the firm.
1-18
Board of Directors
? Typical
? Set
responsibilities:
the CEO and other senior executives;
company-wide policy; fire, and set the compensation of the CEO;
? Advise ? Hire,
? Review
and approve strategy, significant investments, and acquisitions; and
operating plans, capital budgets, and financial reports to common shareholders.
? Oversee
?
CEO/Chairman roles commonly same person in US, but separate in Britain (US moving this direction).
1-19
Organization of the Financial Management Function
Board of Directors
President (Chief Executive Officer)
Vice President Operations
VP of Finance
Vice President Marketing
1-20
1-21
doc_453869257.ppt
After studying Chapter 1, you should be able to:
1. 2. 3.
4.
5. 6. 7.
1-2
Explain why the role of the financial manager today is so important. Describe "financial management" in terms of the three major decision areas that confront the financial manager. Identify the goal of the firm and understand why shareholders' wealth maximization is preferred over other goals. Understand the potential problems arising when management of the corporation and ownership are separated (i.e., agency problems). Demonstrate an understanding of corporate governance. Discuss the issues underlying social responsibility of the firm. Understand the basic responsibilities of financial managers and the differences between a "treasurer" and a "controller."
The Role of Financial Management
?
?
What is Financial Management?
The Goal of the Firm
?
?
Corporate Governance
Organization of the Financial Management Function
1-3
What is Financial Management?
Concerns the acquisition, financing, and management of assets with some overall goal in mind.
1-4
Investment Decisions
Most important of the three decisions.
?
What is the optimal firm size?
?
What specific assets should be acquired? What assets (if any) should be reduced or eliminated?
?
1-5
Financing Decisions
Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). ? What is the best type of financing? ? What is the best financing mix? ? What is the best dividend policy (e.g., dividend-payout ratio)? ? How will the funds be physically acquired?
1-6
Asset Management Decisions
? How
do we manage existing assets efficiently?
Manager has varying degrees of operating responsibility over assets. emphasis on current asset management than fixed asset management.
? Financial
? Greater
1-7
What is the Goal of the Firm?
Maximization of Shareholder Wealth!
Value creation occurs when we maximize the share price for current shareholders.
1-8
Shortcomings of Alternative Perspectives
Profit Maximization
?Maximizing
a firm’s earnings after taxes.
Problems
?
Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.). Ignores changes in the risk level of the firm.
?
1-9
Shortcomings of Alternative Perspectives
Earnings per Share Maximization
?Maximizing
earnings after taxes divided by shares outstanding.
Does not specify timing or duration of expected returns.
Problems
?
? Ignores
?
1-10
changes in the risk level of the firm.
Calls for a zero payout dividend policy.
Strengths of Shareholder Wealth Maximization
?Takes
account of: current and future profits and EPS; the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors.
share price serves as a barometer for business performance.
?Thus,
1-11
What companies say about their corporate goal*
? Cadbury ? Credit
Schweppes: “governing objective is growth in shareowner value” Suisse Group: “achieve high customer satisfaction, maximize shareholder value and be an employer of choice” Chemical Company: “maximize long-term shareholder value”
? Dow
? ExxonMobil:
“long-term, sustainable shareholder value”
*Refer to text for additional details
1-12
The Modern Corporation
Modern Corporation
Shareholders Management
There exists a SEPARATION between owners and managers.
1-13
Role of Management
Management acts as an agent for the owners (shareholders) of the firm.
?
An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.
1-14
Agency Theory
?Jensen
and Meckling developed a theory of the firm based on agency theory.
Theory is a branch of economics relating to the behavior of principals and their agents.
?Agency
1-15
Agency Theory
?Principals
must provide incentives so that management acts in the principals’ best interests and then monitor results.
include, stock options, perquisites, and bonuses.
?Incentives
1-16
Social Responsibility
? Wealth
maximization does not preclude the firm from being socially responsible.
? Assume
we view the firm as producing both private and social goods.
shareholder wealth maximization remains the appropriate goal in governing the firm.
? Then
1-17
Corporate Governance
? Corporate
governance: represents the system by which corporations are managed and controlled.
?Includes
shareholders, board of directors, and senior management.
? Then
shareholder wealth maximization remains the appropriate goal in governing the firm.
1-18
Board of Directors
? Typical
? Set
responsibilities:
the CEO and other senior executives;
company-wide policy; fire, and set the compensation of the CEO;
? Advise ? Hire,
? Review
and approve strategy, significant investments, and acquisitions; and
operating plans, capital budgets, and financial reports to common shareholders.
? Oversee
?
CEO/Chairman roles commonly same person in US, but separate in Britain (US moving this direction).
1-19
Organization of the Financial Management Function
Board of Directors
President (Chief Executive Officer)
Vice President Operations
VP of Finance
Vice President Marketing
1-20
1-21
doc_453869257.ppt