Prin of Financial Managment
Prin of Financial Managment FINA 3332
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This 12 page Class Notes was uploaded by Miss Quentin Grady on Saturday September 19, 2015. The Class Notes belongs to FINA 3332 at University of Houston taught by Darla Chisholm in Fall. Since its upload, it has received 41 views. For similar materials see /class/208199/fina-3332-university-of-houston in Finance at University of Houston.
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Date Created: 09/19/15
Chapter 1 The Role and Objective of Financial Management This chapter introduces the financial management process of the typical firm It looks at the field of finance various financial decisions and their implications and the daily questions faced by the firm s financial managers Primary Areas of Finance 1 Corporate finance also known as Business finance Managerial finance Financial Management 2 Investments 3 Financial Markets and Institutions Money and banking Chapter 1 1 Questions Faced by Financial Managers lWill a particular investment be successful lWhere will the funds come from to finance the investment lDoes the firm have adequate cash or access to cash to meet its daily operating needs Financial Manager s Decision Areas lLongterm 1 Capital budgeting the investment decision 2 Capital structure the financing decision 3 Dividend Policy lShortterm CI Working capital management Chapter 1 2 Basic Business Forms Sole proprietorship l Owned by one person I Advantage Easy formation l Disadvantage Unlimited liability l Disadvantage Difficulty raising funds I Represent 75 percent of all businesses I Account for less than 6 percent of total business revenues Partnership l Owned by two or more persons l About 7 percent of US businesses 5 percent of business revenues l Classified as general or limited I General partners work in the partnership l Advantage Limited partners liability is limited to what is specified in the agreement I Disadvantage Partnership dissolves when a general partner dies l Disadvantage Unlimited liability for general partners Chapter 1 Corporation a legal entity Advantages I Limited liability l Permanency l Ability to raise capital I Has a board of directors l Owners are stockholders I Flexibility l Legal entity l Easy marketability of shares of ownership Disadvantages l Double taxation of income I Cost of incorporation l Complexity Board of Directors l Stockholders elect a board of directors l Board of directors then elect the officers El Chairman of the board El Chief executive officer CEO El Chief operating officer COO El President El Chief financial officer CFO EIVice presidents El Treasurer El Secretary Chapter 1 Who Does What I Board of directors deals with broad policy I The board sets 3 to 5 year strategic plans I Management makes most of the decisions I Management makes daytoday decisions following the strategic plan Stockholder Rights l Dividends l Asset l Voting for board members major policy I Preemptive rights on new shares Priority of Corporate Securities Debt Securities Bonds highest Preferred stock PS Common stock CS lowesv Chapter 1 Shareholder Wealth Maximization 0 Primary objective of financial management 0 Primary objective of the financial manager NOT Profit maximization Chapter 1 Shareholder Wealth Maximization l Considers the timing and risk of the benefits from stock ownership l Determines that a good decision increases the price of the firm s common stock CS I Is an impersonal objective I Is concerned for social responsibility Maximize NPV of firm Maximize common stock price per share Stockholder Wealth Measured by the market value of common stock Value of Equity Market Capitalization Market Cap shares outstanding x Price 10 million shares10 per share 100 million Large gt 10 billion Mid 1 10 billion Small lt 1 billion Chapter 1 Divergent Objectives create Agency Problems I Problem created by separation of l Owners shareholders l Management and Employees l Management may maximize its own welfare instead of the owners wealth Agency Problem Second Type 0 Problem created by separation of 0 Owners 0 Creditors o Caused by conflicting interests concerning risk and returns 0 Protective covenants in loan agreements Chapter 1 Agency Costs I Corporate governance l Monitoring amp Bonding l Management compensation l Threat of takeovers l Greenmail I Annual audit by accounting firm I Recent Development l SarbanesOxley Act Shareholder Wealth Maximizing is a Market Concept and Results in gt Maximizing PV of Expected Cash FlowsReturns Important note Success is measured by Market Value of Common Stock Not by profit maximization Chapter 1 Limitations of Profit Maximization l Static nature of standard microeconomic model Lack of time dimension l Variable definition of profit I Provides no direct way for managers to consider the risk of alternative decisions Three Basic Factors Determine Common Stock Market Value I 1 Amount of Expected Cash Flows l 2 Timing of Expected Cash Flows l 3 Risk of Expected Cash Flows Chapter 1 10 Common Stock Price per Share Represents the present value of expected future cash flows to shareholders Present Value Discounted value of future cash flows Discount rate interest rate Reflects risk of cash flows Higher risk higher interest rate Future cash flows consist of Dividends Capital gainslosses Cash Flow Concept central to l Financial analysis I Planning l Resource allocation CF does not equal accounting profit Sources of Cash l Internal l External Chapter 1 11 NPV of an Investment NPV PV of future cash flows minus PV of cash outlays Represents the contribution of that investment to the value of the firm Represents the amount the Stockholder Wealth is expected to increase as a result of the investment Chapter 1 12
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