Chapter The Goals and Functions of Financial Management

Transcription

1 Chapter The Goals and Functions of Financial Management

2 Chapter 1 - Outline LT 1-1 How Finance Builds on The Disciplines of Accounting and Economics The Evolution of Finance The Goals of Financial Management Functions and Activities of Financial Management Forms of Organization The Role of Financial Markets Format of The Text

3 Financial Management LT 1-2 Financial Management (or Business Finance) is concerned with managing a corporation s money For example, a company must decide: where to invest its money whether or not to replace an old asset when to issue new stocks and bonds

4 The Field of Finance LT 1-3 Finance is related to: Accounting, which provides data in financial statements Economics, which provides decision-making tools such as pricing theory (supply and demand), risk analysis, comparative return analysis information on the economic and financial environment in which the company operates

5 The Economic Environment PPT 1-5 The financial manager considers many economic factors, such as inflation unemployment industrial production domestic and international competition foreign trade statistics international capital flows exchange rates changes in technology consumer and investor attitudes the state of financial markets changes in government policy etc. etc.

6 Figure 1-2 Prime rate versus percent change in the CPI PPT 1-17 Percent Consumer price index (average annual rate) Prime rate (December) Source:

7 The Evolution of Finance LT 1-5 The Exchanges develop Achieved recognition at the turn of last century 1920 s: raising capital 1930 s: capital preservation, bankruptcy and reorganization 1950 s: shift to analytical decision-making, capital budgeting 1960 s into 1980 s: risk/return relationship Recent years: relationship between the owners and the managers

8 Nobel Prize Winners for Finance ( Economics) The Nobel laureates are Franco Modigliani 1985 Harry Markowitz 1990 Merton Miller 1990 William Sharpe 1990 Robert Merton 1997 Myron Scholes

9 The Goals of Financial Management PPT 1-7 Primary goal is to maximize the wealth of the company s shareholders (owners) by increasing the market value (price) of their shares May conflict with social / ethical goals (for example, pollution control) interests of management (for example, short-term compensation) Management can encourage an increase in share price by earning an attractive return at an acceptable level of risk

10 The Finance Department In The Firm Board of Directors Chief Executive Officer Vice President Marketing Vice President Finance(CFO) Vice President Production Treasurer Controller Cash Manager Credit Manager Tax Manager Cost Accounting Manager Capital Expenditures Financial Planning Financial Accounting Manager Data Processing Manager

11 Figure 1-1 Functions of the Financial Manager PPT 1-1 Daily Cash management (receipt and disbursement of funds) Credit management Inventory control Short-term financing Exchange and interest rate hedging Bank relations Occasional Intermediate financing Bond issues Leasing Stock issues Capital budgeting Dividend decisions Forecasting Profitability Goal: Maximize Trade-off shareholder wealth Risk

12 Functions and Activities of Financial Management LT 1-7 Functions involve: raising funds for the firm at minimal cost and acceptable risk investing those funds in company assets so as to earn an attractive return given acceptable risks Activities include: Working Capital Management short-term (S/T) financial decisions (<1 year) ex., managing cash and other current assets Capital Budgeting long-term (L/T) financial decisions (>1 year) ex., purchasing a new machine in the future Financing decisions how to raise money

13 Forms of Organization 1-8 LT Sole Proprietorship Single ownership Simplicity of decision making Low organizational and operating costs Unlimited liability. Earnings are taxed as personal earning of the individual owner limited access to capital

14 Forms of Organization 1-8 LT Partnership Two or more owners (partners) Usually formed by articles of partnership agreement Unlimited liability for all partners unless a limited partnership is formed which provides limited liability for one or more partners. At least one partner must be a general partner Earnings are taxed as personal earnings of partners Greater access to capital

15 Forms of Organization 1-8 LT Corporation Most important form of business in terms of revenue and profits Legal entity Formed by articles of incorporation Shareholders (owners) have limited liability Easy divisibility of ownership Managed by the board of directors Double taxation of earnings large corporation can raise money by selling more shares or bonds

16 Financial Markets PPT 1-15 Global network of corporations, financial institutions, governments and individuals that either need money or have money to lend or invest Money markets deal in short-term securities (<1 year) Ex.; Treasury Bills, commercial paper Capital markets deal in long-term securities Ex.; common stock, preferred stock, corporate bonds, government bonds Financial markets determine value and allocate capital to the most productive use on a risk-return basis Financial market characteristics reliance on debt, and low but volatile interest rates internationalization

17 PPT 1-18 Summary and Conclusions The financial manager: controls the daily cash inflows and outflows resulting from business operations makes the occasional investment and financing decisions essential for the future financial success of the business may work in a corporation or other form of business organization Their overriding goal is to maximize the wealth of the owners by earning an attractive return in the business at an acceptable level of risk

18 Format of the Text LT , Introduction. Chapter 1 2, Financial analysis and planning. Chapter 2 ~ 5 3, Working capital management. Chapter 6 ~ 8 4,The capital budgeting process. Chapter 9 ~ 13 5,Long-term financing. Chapter 14 ~ 19 6,Expanding the perspective of corporate finance. Chapter 20 ~ 21