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8/12/2019 FMP Introduction
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Chap ter 1
The Role of FinancialManagement
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The Role o f
Financ ial Management
What is Financial Management?
The Goal of the Firm
Corporate Governance
Organization of the FinancialManagement Function
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What is Financ ial
Management?
Concerns the acquisition,
financing, andmanagement of assets
with some overall goal inmind.
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Investment Decis ions
What is the optimal firm size?
What specific assets should be
acquired?
What assets (if any) should be
reduced or eliminated?
Most
important of the three
decisions.
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Financing Decis ions
What is the best type of financing?
What is the best financing mix?
What is the best dividend policy (e.g.,dividend-payout ratio)?
How will the funds be physically
acquired?
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).
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Asset Management
Decis ions
How do we manage existing assets
eff icient ly?
Financial Manager has varying degrees
of operating responsibility over assets.
Greater emphasis on current assetmanagement than fixed asset
management.
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What is the Goal
o f the Firm?
Maxim izat ion o f
Shareho lder Wealth!
Value creat ion occurs whenwe maxim ize the share pr ice
for cu rrent shareho lders.
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Sho r tcom ings of
A lternat ive Perspec t ives
Could increase current profits while
harming firm (e.g., defer maintenance,issue common stock to buy T-bills, etc.).
Ignores changes in the risk level of the
firm.
Profit Maximization
Maximizing a firms earnings after taxes.
Problems
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Sho r tcom ings of
A lternat ive Perspec t ives
Does not specify timing or duration of
expected returns.
Ignores changes in the risk level of the firm.
Calls for a zero payout dividend policy.
Earnings per Share Maximization
Maximizing earnings after taxes divided
by shares outstanding.Problems
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Streng ths o f Shareho lder
Wealth Max im izat ion
Takes account of: current and future
profits and EPS; the timing,
duration, and risk of profits and EPS;dividend policy; and all other
relevant factors.
Thus, share price serves as a
barometer for business performance.
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The Modern Corporat ion
There exists a SEPARATION
between owners and managers.
Modern Corporation
Shareholders Management
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Role o f Management
An agentis an individual
authorized by another person,called the principal, to act in
the latters behalf.
Management acts as an agent
for the owners (shareholders)
of the firm.
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Agency Theory
Agency Theory is a branch of
economics relating to thebehavior of principals and their
agents.
Jensen and Meckling developed
a theory of the firm based onagency theory.
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Agency Theory
Incentives include, stock options,perquisites, and bonuses.
Principals must provide incent ives
so that management acts in the
principals best interests and then
moni tor results.
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Social Responsib i li ty
Wealth maximization does no t
preclude the firm from being socially
responsible.
Assume we view the firm as producing
bothprivate and social goods.
Then shareholder wealth maximization
remains the appropriate goal in
governing the firm.
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Corporate Governance
Corpo rate governance: represents the
sys tem by wh ich co rporat ions are
managed and con tro l led.
Includes shareholders, board of
directors, and senior management.
Then shareholder wealth maximization
remains the appropriate goal in
governing the firm.
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Board o f Directo rs
Typical responsibilities:
Set company-wide policy;
Advise the CEO and other senior executives;Hire, fire, and set the compensation of the CEO;
Review and approve strategy, significant investments, and
acquisitions; and
Oversee operating plans, capital budgets, and financial
reports to common shareholders.
CEO/Chairman roles commonly same person in US,
but separate in Britain (US moving this direction).
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Organ izat ion o f the Financ ial
Management Funct ion
Board of Directors
President
(Chief Executive Officer)
Vice President
Operations
Vice President
Marketing
VP of
Finance
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TreasurerCapital Budgeting
Cash Management
Credit Management
Dividend DisbursementFin Analysis/Planning
Pension Management
Insurance/Risk Mngmt
Tax Analysis/Planning
Organ izat ion o f the Financ ial
Management Funct ion
VP of Finance
ControllerCost Accounting
Cost Management
Data Processing
General LedgerGovernment Reporting
Internal Control
Preparing Fin Stmts
Preparing Budgets
Preparing Forecasts
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