1 / 17

Introduction to Financial Management

Introduction to Financial Management. P.V. Viswanath Based partly on slides from Fundamentals of Corporate Finance Brealey, Myers and Marcus, 4 th ed. Key Concepts and Skills. Know the basic types of financial management decisions and the role of the financial manager

richelle
Download Presentation

Introduction to Financial Management

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. Introduction to Financial Management P.V. Viswanath Based partly on slides from Fundamentals of Corporate Finance Brealey, Myers and Marcus, 4th ed.

  2. Key Concepts and Skills • Know the basic types of financial management decisions and the role of the financial manager • Know the goal of financial management • Know the financial implications of the different forms of business organization • Understand the conflicts of interest that can arise between owners and managers P.V. Viswanath

  3. Chapter Outline • Finance: A Quick Look • Forms of Business Organization • Business Finance and The Financial Manager • The Goals of the Corporation • The Agency Problem and Control of the Corporation • Financial Markets and the Corporation P.V. Viswanath

  4. Organizing a Business P.V. Viswanath

  5. 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 Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate) Corporation P.V. Viswanath

  6. 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 and profitability • Personal finance • Budgeting, retirement planning, college planning, day-to-day cash flow issues P.V. Viswanath

  7. (2) (1) (4a) (4b) (3) (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors The Role of The Financial Manager Firm's Financial operations Investors Manager Real assets P.V. Viswanath

  8. What questions does finance answer? • 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 investment? • How will we manage the everyday financial activities of the firm? P.V. Viswanath

  9. Financial Managers • The top financial manager within a firm is usually the Chief Financial Officer (CFO). Under the CFO, we have: • Treasurer – oversees cash management, credit management, capital expenditures and financial planning • Controller – oversees taxes, cost accounting, financial accounting and data processing P.V. Viswanath

  10. 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? P.V. Viswanath

  11. Goal Of Financial Management • What should be the goal of a corporation? • Maximize profit? • Minimize costs? • Maximize market share? • Maximize the current value of the company’s stock? • General guide: Maximize shareholder wealth, keeping in mind the effects on firm value. • Does this mean we should do anything and everything to maximize owner wealth? P.V. Viswanath

  12. The Agency Problem • Agency relationship • Principal hires an agent to represent their interest • Stockholders (principals) hire managers (agents) to run the company • Agency problem • Conflict of interest between principal and agent • Management goals and agency costs P.V. Viswanath

  13. Managing Managers 1 - Compensation plans: Incentives can be used to align management and stockholder interests 2 - Board of Directors 3 – Takeovers: The threat of a takeover may result in better management 4 - Specialist Monitoring 5 - Auditors P.V. Viswanath

  14. Financial Markets Money Primary Markets OTC Markets Secondary Markets P.V. Viswanath

  15. Funding Sources & Financial Markets • Internally Generated Cash flows • Cash generated by the business is retained and reinvested as long as positive value-adding projects can be found. • Primary and secondary markets • Dealer vs. auction markets • Listed vs. over the counter securities • NYSE • NASDAQ P.V. Viswanath

  16. Funding Sources & Financial Markets • Financial Intermediaries – raise money from investors and provide financing for companies. • Mutual Funds – raise money by selling shares to investors • Financial Institutions – raise financing in special ways • Banks – raise financing by accepting deposits; they also provide other financial services. • Insurance Companies – they raise money by selling insurance policies. P.V. Viswanath

  17. Functions of Financial Markets and Intermediaries • Transporting Cash across time • Liquidity • Payment Mechanism (e.g. checks) • Reducing Risk • Providing Information, which firms use to • Hedge • Make financing decisions • Align employee goals with stockholder goals. P.V. Viswanath

More Related