Foundations of Financial Management

1. Foundations of Financial Management Ohio University College of Business

2. How do we learn? • There are primarily seven ways

3. How do we learn? • Discussion • Practice doing • Reading • Lecture • Audiovisual • Teach others • Demonstration

5. What do you think of when someone says “finance”?

7. Why is finance important personally? • We need money to live (food, clothing, shelter) and we probably want money for a great number of things (concert tickets, cars, computers, etc.).  • Run your own firm - how to invest and how to raise money.  • Teaches us to understand the other side of every transaction.  If you understand what your employer wants, it is easier to achieve this and hence you are in a better position for raises and promotions. 

8. Why is finance important personally? • Few people will not work their entire life at the same firm.  Knowing in advance your financial position and options dramatically reduces your stress in this time of change.  • Taxes can take 40% of what we earn.  Making the right investments can cut this tax burden.  • Star athletes have gone from making millions to flat broke. 

9. US Fiscal Condition United States Tax revenue: $2,170,000,000,000Fed budget: $3,820,000,000,000New debt: $1,650,000,000,000National debt: $14,271,000,000,000Recent budget cut: $38,500,000,000

10. Make the #s relevant Annual family income: $21,700Money the family spent: $38,200New debt on the credit card: $16,500Outstanding balance on credit card: $142,710Total budget cuts: $385 http://www.youtube.com/watch?v=Li0no7O9zmE

11. How is Finance related to other fields? • Marketing • Budgets, marketing research, marketing financial products • Accounting • Dual accounting and finance function, preparation of financial statements • Management • Strategic thinking, job performance, profitability • Personal finance • Budgeting, retirement planning, college planning, day-to-day cash flow issues

12. Daniel Pink – Does $ Increase Performance? http://www.youtube.com/watch?v=u6XAPnuFjJc

13. Finance: The Art and Science of Managing Money

14. Finance Utilizes? • Economics • Accounting

15. Financial analysis is like a…

17. Analyst’s opinion of GM

18. What do you see?

19. What do you see?

20. What do you see?

21. Count every “F” below? FINISHED FILES ARE THE RE SULT OF YEARS OF SCIENTI FIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS...

22. What number goes in the triangle?

23. Organizations that hire Finance Grads • Banks • Insurance Companies • Any Large Business • Investment Bankers • Stockbrokers

24. Careers in Finance • Commercial Banking • Financial Planning • Insurance • Real Estate • Money Management • Corporate Finance

25. Overview of Semester • Intro to Finance • Accounting Review • Financial Statement Analysis • Time Value of Money • Capital Budgeting • Stock and Bond Valuation

26. CHAPTER 1An Overview of Financial Management Forms of Businesses Goals of the Corporation Agency Relationships Ethics in Finance

27. Key Concepts and Skills Have a good understanding of: • The basic types of financial management decisions and the role of the financial manager • The goal of financial management • The financial implications of the different forms of business organization • The conflicts of interest that can arise between owners and managers

28. Basic Areas Of Finance • Corporate finance = Business Finance • Investments • Financial institutions • International finance

29. Investments • Work with financial assets such as stocks and bonds • Value of financial assets, risk versus return, and asset allocation • Job opportunities • Stockbroker or financial advisor • Portfolio manager • Security analyst

30. Financial Institutions • Companies that specialize in financial matters • Banks – commercial and investment, credit unions, savings and loans • Insurance companies • Brokerage firms • Job opportunities

31. International Finance • An area of specialization within each of the areas discussed so far • May allow you to work in other countries or at least travel on a regular basis • Need to be familiar with exchange rates and political risk • Need to understand the customs of other countries; speaking a foreign language fluently is also helpful

32. Why Study Finance? • Marketing • Budgets, marketing research, marketing financial products • Accounting • Dual accounting and finance function, preparation of financial statements • Management • Strategic thinking, job performance, profitability • Personal finance • Budgeting, retirement planning, college planning, day-to-day cash flow issues

33. Business Finance • Some important questions that are answered using finance • What long-term investments should the firm take on? • Where will we get the long-term financing to pay for the investments? • How will we manage the everyday financial activities of the firm?

34. Financial Manager • The top financial manager within a firm is usually the Chief Financial Officer (CFO) • Treasurer – oversees cash management, credit management, capital expenditures, and financial planning • Controller – oversees taxes, cost accounting, financial accounting, and data processing

35. Financial Management Decisions • Capital budgeting • What long-term investments or projects should the business take on? • Capital structure • How should we pay for our assets? • Should we use debt or equity? • Working capital management • How do we manage the day-to-day finances of the firm? • Financial managers try to answer some, or all, of these questions

36. Forms of Business Organization Three major forms in the United States • Sole proprietorship • Partnership • General • Limited • Corporation • S-Corp • Limited liability company (LLC)

37. Sole Proprietorship Business owned by one person • Advantages • Easiest to start • Least regulated • Single owner keeps all of the profits • Taxed once as personal income • Disadvantages • Limited to life of owner • Equity capital limited to owner’s personal wealth • Unlimited liability • Difficult to sell ownership interest

38. Partnership Business owned by two or more persons • Advantages • Two or more owners • More capital available • Relatively easy to start • Income taxed once as personal income • Disadvantages • Unlimited liability • Partnership dissolves when one partner dies or wishes to sell • Difficult to transfer ownership

39. Corporation A legal “person” distinct from owners and a resident of a state • Advantages • Limited liability • Unlimited life • Separation of ownership and management • Transfer of ownership is easy • Easier to raise capital • Disadvantages • Separation of ownership and management (agency problem) • Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible)

40. International Corporate Forms • All of these forms feature public ownership and limited liability

41. Financial Goals of the Corporation • The primary financial goal is _______________.

42. Goal Of Financial Management • What should be the goal of a corporation? • Maximize the market value of the existing owners’ equity • Maximize the current value per share of the company’s existing stock

43. Goal Of Financial Management • Does this mean we should do anything and everything to maximize owner wealth? • Outsourcing? • Off-shoring? • Enron? • Corporate support of charities? http://globalpublicsquare.blogs.cnn.com/2012/09/27/why-outsourcing-shouldnt-be-a-dirty-word/

44. Why not maximize profits?

45. Is stock price maximization the same as profit maximization? • No, despite a generally high correlation amongst stock price, EPS, and cash flow. • Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa).

46. The goal of the financial manager is to maximize the value of the firm.

47. What determines a firm’s value? • A firm’s value is the present value of all future cash flows.

48. Market Capitalizations

50. What is Ethical Behavior? • Ethical behavior tends to be good for business and involves demonstrating respect for key moral principles that include honesty, fairness, equality, dignity, diversity and individual rights.