1 / 30

CHAPTER 1 AN OVERVIEW OF MANAGERIAL FINANCE

CHAPTER 1 AN OVERVIEW OF MANAGERIAL FINANCE. What is Finance? Finance is the Science and Art of Managing Money Finance Deals with Decisions about How to: Raise Money Invest Money Spend Money. Finance is important For every body (How): When you want to borrow to buy a car or a house

chelsey
Download Presentation

CHAPTER 1 AN OVERVIEW OF MANAGERIAL FINANCE

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CHAPTER 1 AN OVERVIEW OF MANAGERIAL FINANCE N. ALSALEH: FIN220-CH1

  2. What is Finance? • Finance is the Science and Art of Managing Money • Finance Deals with Decisions about How to: Raise Money Invest Money Spend Money N. ALSALEH: FIN220-CH1

  3. Finance is important For every body (How): When you want to • borrow to buy a car or a house • retire ( the amount of payment you receive) • start your own business • invest your money N. ALSALEH: FIN220-CH1

  4. Finance and other disciplines: Finance is closely related to: • Management • Marketing: • Information Systems • Accounting • Economics N. ALSALEH: FIN220-CH1

  5. Finance & Accounting Differences between Finance & Accounting: AccountingFinance Gathering & Presenting Decision Making Accounting Information Accrual Concept Cash Concept N. ALSALEH: FIN220-CH1

  6. On December 20, 2006, Gulf Co. generated sales of $1,000,000 on credit to be paid after 30 days ( Jan , 19, 2007). Dec,20,2006 Account Receivables $1,000,000 Sales $1,000,000 January 19,2007 Cash $1,000,000 Account Receivables $,1000,000 N. ALSALEH: FIN220-CH1

  7. Finance consists of three interrelated areas • Financial Markets and Institutions • Investments • Managerial Finance) Role of Finance within a Business Organization ( N. ALSALEH: FIN220-CH1

  8. Forms of Business Organizations (Proprietorship, Partnership, Corporation) • Proprietorship A business owned by one Individual. • Partnership A business owned by two or more than two persons. N. ALSALEH: FIN220-CH1

  9. Corporation • A corporation is a legal entity created By law. • it is separate and distinct from its owners and managers. • Money contributed to start a corporation is called capital stock and is divided into shares. • The owners of the corporation are called stockholders or shareholders. N. ALSALEH: FIN220-CH1

  10. Corporation enjoys four major advantages: 1. Limited Liability 2. Permanency 3. Liquidity 4. Ability to Raise Capital N. ALSALEH: FIN220-CH1

  11. Role of Finance in a typical Business Organization N. ALSALEH: FIN220-CH1

  12. Stockholders BOD President (CEO) VP-Marketing VP- Finance VP-Production Treasurer Controller Accounting Functions N. ALSALEH: FIN220-CH1

  13. Treasurer Capital Budgeting Managing Cash & Marketable Securities Managing Risk Capital Structure Managing Inventory N. ALSALEH: FIN220-CH1

  14. Responsibilities & Functions of the Financial manager Forecasting & Planning Investment & Financing Decisions Coordination & Control Dealing with Financial Markets N. ALSALEH: FIN220-CH1

  15. The goals of the Corporation The management primary goal is: stockholder wealth maximization • This is translated into maximizing the value of the firm as measured by the price of the firm’s common stock. N. ALSALEH: FIN220-CH1

  16. The Goals of the Corporation Stockholder Wealth Maximization Stock Price Maximization N. ALSALEH: FIN220-CH1

  17. Social Responsibility • The concept that businesses should be Actively concerned with the welfare of society at large. • Businesses are responsible for the welfare of their employees, customers, and the communities in which They operate? N. ALSALEH: FIN220-CH1

  18. Stock Price Maximization and Social Welfare Actions that maximize stock prices are consistent with social welfare. STPM requires: • Company to produce high quality goods and services at the lowest possible cost. • The development of products that consumers want and need. • Requires efficient and courteous services, adequate stocks of merchandise and good location. N. ALSALEH: FIN220-CH1

  19. Wealth maximization (Value) Management must consider the following factors in its attempt to maximize wealth: • Projected earnings per Share (EPS) rather than profit maximization, • Timing of the earnings stream, • Riskiness of the projected earnings, N. ALSALEH: FIN220-CH1

  20. Management must consider the following factors in its attempt to maximize wealth • Projected earnings per Share (EPS) rather than profit maximization, b. Timing of the earnings stream, c. Riskiness of the projected earnings, N. ALSALEH: FIN220-CH1

  21. Gulf Star reported net income of $200,000 for 2005. Gulf has 100,000 shares outstanding. You own 100 shares. So your share of the earnings is $200. During 2006, the company issued 25,000 more shares and reported net income of $220,000. The earnings per share is: $220,000/125,000 = $1.76/share. Your share of the earnings is $1.76x100= $176 N. ALSALEH: FIN220-CH1

  22. Timing of the earnings stream ( increase in profits Million) YEAR1 YEAR2 TOTAL Project A 5 2 7 Project B 2 5 7 N. ALSALEH: FIN220-CH1

  23. Riskiness of the projected earnings Project A-very safe project and is expected to raise earnings by $1.0 per share. Project B - very risky project and is expected to raise earnings by $2.00 per share. N. ALSALEH: FIN220-CH1

  24. Agency Relationship Agency relationship exists when one or more people ( the principals) hire another person (the agent) to perform a service and then Delegate decision-making authority to that agent. Agency Relationships Exist between: • Stockholders and managers and • Stockholders and creditors N. ALSALEH: FIN220-CH1

  25. Stockholders versus Managers • Agency relationship that exist between stockholders and mangers gives rise to what so called agency problem. • Agency problem: the likelihood that mangers place personal goals ahead of corporate goals. N. ALSALEH: FIN220-CH1

  26. Mechanisms available to make mangers to act in the shareholders’ Best interest? 1. Structuring Managerial Incentives • . Performance shares • . Executive stock option 2. Shareholder intervention (The threat of firing) 3. The threat of takeover N. ALSALEH: FIN220-CH1

  27. Stockholders versus Creditors Conflicts between stockholders and Creditors result from: • Actions taken by stockholders that jeopardize the interest of the creditors N. ALSALEH: FIN220-CH1

  28. Creditors lend funds to the firm at rates that are based on the following factors: • The riskiness of the firm’s existing assets • The riskiness of future asset additions • Firm’s existing capital structure • Future capital structure N. ALSALEH: FIN220-CH1

  29. The goal of wealth maximization requires fair play with creditors • Stockholder wealth depends on continued access to capital market and abiding by both the letter and the sprit of credit agreements. • Managers as agents of both the creditors and the stockholders, must act in a manner that is fairly balanced between the interests of these two parties N. ALSALEH: FIN220-CH1

  30. Stakeholders Individuals or entities that have an interest in the well-being of a firm, including: a. Stockholders, b. Creditors, c. Employees d. Customers and ,e. Suppliers • Maximizing shareholder wealth requires the fair treatment of all stakeholders N. ALSALEH: FIN220-CH1

More Related