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Copyright © 2002 by Harcourt College Publishers. All rights reserved.
Learning Goals:
1. Topics in Fin 350
2. Goal of financial decisions
3. Agency problem
CHAPTER 1Overview of Financial Management
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Managerial Finance can be divided into two parts:
1. Short-term financial management
2. Long-term financial management
Managerial Finance
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Fin 340 covers short-term finance.
Short-term finance includes: financial analysis and planning working capital management.
Fin 340 Topics
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Fin 350 covers long-term finance. Strategic decisions, with major implications for success or failure, including:______________________________________________________
Fin 350 Topics
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The basic goal of financial decisions is to maximize stockholder wealth.
Why? Stockholders = owners.
Investments are made to earn financial returns.
Goal of Financial Decisions
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Maximizing Shareholder Wealth
Maximizing shareholder wealth considers:
Cash flows
Timing of cash flows
Risk
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What are the social implications of maximizing stock price?
Do efforts to maximize firm’s stock price have a negative on other stakeholders?
In some cases, perhaps, but not necessarily.
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Do managers always act in shareholders’ best interest?
Not necessarily. A potential conflict of interest exists between managers and shareholders. The relationship between managers and shareholders is an example of an agency relationship.
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What is an agency relationship?
An agency relationship arises whenever an individual or organization, called an agent, has decision-making authority affecting another party, or principal.
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Agency relationships
The basic agency relationship in corporate finance is the conflict of interest between shareholders and ___________________.In principle, managers should work in the interests of the owners.In fact, managers are also concerned with their personal well-being.
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Agency relationships
Can the agency conflict between shareholders and managers be resolved? Possibilities:
Incentive-based compensation
Threat of firing &/or hostile takeover
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Agency relationships
Other agency relationships in finance:
stockholders vs creditors
managers vs creditors
