Financial Management

Theory and Practice

Tenth Edition

Eugene F. Brigham

Michael C. Ehrhardt

Chapter 1

Goals and Governance of the Firm

Instructor: Sanam TaimoorInstitute of Business Management

Topics

• What is Financial Management

• Finance and You

• How are companies organized

• Goals of Corporations

• Business Ethics and Social Responsibility

• Agency Relationship

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What is Financial Management

The planning, directing, monitoring, organizing, and controlling of the monetary resources of

an organization

• Main issues in financial management

– Factors determining company’s stock price

– Managers’ choices to add value

– Ensuring sufficient cash levels

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Finance and Your Career

• Capital Markets and Institution– Stock Markets, Commodities Markets, Banks,

Insurance Companies, Mutual Funds

• Investments– Brokerage Houses

– Main function in investments:• Sales

• Analysis of individual securities

• Determining optimal mix of securities

• Financial Management

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Forms of Organizations

• Sole Proprietorship

• Partnership

• Corporations

• Note: Read Pages 6-9

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Finance in Organizational Structure of the Firm

Board of Directors

CEO

Vice President

Sales

Vice President Finance

Treasurer

Credit Manger

Inventory Manager

Capital Budgeting Manager

Controller

Cost Accountant

Financial Accountant

Tax Accountant

Vice President Marketing

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Goals of the Corporations

• What should be the main goal of the organization?

• Stock Price Maximization and not Profit Maximization

– Stockholders are society

– Consumer Benefit

– Employee Benefit

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How to maximize Stock Price?

• What determines stock price?

– Company’s ability to generate cash flows now and in the future

• Determinants of cash flows

– Unit Sales

– After-tax operating margins

– Capital Requirement

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Ethics and Social Responsibility

• Business Ethics– “Standard of conduct and moral behavior”

– “A company’s attitude and conduct towards its employees, customers, community and stockholders”

(Fundamentals of Financial Management. Brigham and Houston – 10th Edition)

• Social Responsibility– Only shareholders’ interests or welfare of

employees and society as well?

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Agency Relationship

• Agency relationship arises when a principle hires an agent to perform duties on behalf of the principle

• Within financial management primary agency relationships are

– Between stockholders and managers

– Between stockholders and creditors

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Agency Conflict

• Occurs when agents behave in their own interests rather then those of the principle’s

• Ways to avoid agency conflicts”

– Managerial Compensation

– Direct intervention by shareholders

– Threat of firing

– Threat of takeover

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