Download materi Financial Management 1

uThe Role of Financial Management

uAfter studying Chapter 1, you should be able to:

•    Explain why the role of the financial manager today is so important.

•    Describe "financial management" in terms of the three major decision areas that confront the financial manager.

•    Identify the goal of the firm and understand why shareholders' wealth maximization is preferred over other goals.

•    Understand the potential problems arising when management of the corporation and ownership are separated (i.e., agency problems).

•    Demonstrate an understanding of corporate governance.

•    Discuss the issues underlying social responsibility of the firm.

•    Understand the basic responsibilities of financial managers and the differences between a "treasurer" and a "controller."

uThe Role of    
Financial Management

u  What is Financial Management?

u  The Goal of the Firm

u  Corporate Governance

u  Organization of the Financial Management Function

uWhat is Financial Management?

Concerns the acquisition, financing, and management of assets with some overall goal in mind.

uInvestment Decisions

u  What is the optimal firm size?

u  What specific assets should be acquired?

u  What assets (if any) should be reduced or eliminated?

uFinancing Decisions

u What is the best type of financing?

u What is the best financing mix?

u What is the best dividend policy (e.g., dividend-payout ratio)?

u How will the funds be physically acquired?

uAsset Management Decisions

u How do we manage existing assets efficiently?

u Financial Manager has varying degrees of operating responsibility over assets.

u Greater emphasis on current asset management than fixed asset management.

uWhat is the Goal of the Firm?

Maximization of Shareholder Wealth!

Value creation occurs when we maximize the share price for current shareholders.

uShortcomings of Alternative Perspectives

u Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.).

u Ignores changes in the risk level of the firm.

uShortcomings of Alternative Perspectives

u Does not specify timing or duration of expected returns.

u Ignores changes in the risk level of the firm.

u Calls for a zero payout dividend policy.

uStrengths of Shareholder Wealth Maximization

uTakes account of: current and future profits and EPS;  the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors.

uThus, share price serves as a barometer for business performance.

uWhat companies say about their corporate goal*

u Cadbury Schweppes: “governing objective is growth in shareowner value”

u Credit Suisse Group: “achieve high customer satisfaction, maximize shareholder value and be an employer of choice”

u Dow Chemical Company: “maximize long-term shareholder value”

u ExxonMobil: “long-term, sustainable shareholder value”

*Refer to text for additional details

uThe Modern Corporation

There exists a SEPARATION between owners and managers.

uRole of Management

u  An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.

uAgency Theory

uAgency Theory is a branch of economics relating to the behavior of principals and their agents.

uAgency Theory

uIncentives include, stock options, perquisites, and bonuses.

uSocial Responsibility

u Wealth maximization does not preclude the firm from being socially responsible.

u Assume we view the firm as producing both private and social goods. 

u Then shareholder wealth maximization remains the appropriate goal in governing the firm.

uCorporate Governance

u Corporate governance: represents the system by which corporations are managed and controlled.

uIncludes shareholders, board of directors, and senior management. 

u Then shareholder wealth maximization remains the appropriate goal in governing the firm.

uBoard of Directors

u Typical responsibilities:

u Set company-wide policy;

u Advise the CEO and other senior executives;

u Hire, fire, and set the compensation of the CEO;

u Review and approve strategy, significant investments, and acquisitions; and

u Oversee operating plans, capital budgets, and financial reports to common shareholders.

u  CEO/Chairman roles commonly same person in US, but separate in Britain (US moving this direction).

uSarbanes-Oxley Act of 2002

u  Sarbanes-Oxley Act of 2002 (SOX): addresses corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information

uImposes new penalties for violations of securities laws

uEstablished the Public Company Accounting Oversight Board (PCAOB) to adopt auditing, quality control, ethics, disclosure standards for public companies and their auditors, and policing authority

uGenerally increasing the standards for corporate governance

uOrganization of the Financial Management Function

uOrganization of the Financial Management Function

uTexas Instruments BAII+

u Integrated throughout the Chapters

u A Useful Financial Tool

u Does NOT replace financial understanding

uChange Display Setting

Change the decimal places displayed from “2” to “Floating”

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Change the periods per year from “12” to “1”

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