Introduction to Financial Management Chapter 1 1-1.
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Transcript of Introduction to Financial Management Chapter 1 1-1.
Introduction to Financial Management
Chapter 1
1-1
Finance Vs. Econ and Acct
What is Finance?
Capital Budgeting Capital Structure Working Capital Management
1-2
Finance
Financial Management (Corporate Finance).
Capital Markets. Investments.
Security Analysis Portfolio Theory Market Analysis
1-3
Finance Within the Organization
1-4
Stock Prices and Shareholder Value
The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price. Value of any asset is present value of cash
flow stream to owners. Investors expect CF’s. Risky or not?
Most significant decisions are evaluated in terms of their financial consequences. Production (Machine)
Marketing (Celebrity)
1-5
Stock Prices and Intrinsic Value
In equilibrium, a stock’s price should equal its “true” or intrinsic value.
Intrinsic value is a long-run concept.
To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value.
Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run.
1-6
Determinants of Intrinsic Values and Stock Prices
1-7
“True” Risk
“Perceived” Investor Returns
“Perceived” Risk
Managerial Actions, the Economic Environment, Taxes, and the Political
Climate
Stock’s Intrinsic Value
Stock’s Market Price
Market Equilibrium:Intrinsic Value = Stock
Price
Some Important Business Trends
Recent corporate scandals have reinforced the importance of business ethics, and have spurred additional regulations and corporate oversight.
Increased globalization of business.
The effects of ever-improving information technology
Corporate Governance
1-8
Business Ethics
How should employees deal with unethical behavior? Fudging the books or holding back important
info.
Refuse to obey or report to a higher authority
Bankruptcies of Enron and WorldCom Negative effect on the industry
Conflicts of profits and ethics Norfolk Southern coal trains pollution
Merck and Vioxx pain medicine
1-9
Conflicts Between Managers and Stockholders
Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders).
But the following factors affect managerial behavior: Managerial compensation packages
Direct intervention by shareholders
The threat of firing
The threat of takeover1-10
Conflicts Between Stockholders and Bondholders
Stockholders are more likely to prefer riskier projects, because they receive more of the upside if the project succeeds. By contrast, bondholders receiving fixed payments are more interested in limiting risk.
Bondholders are particularly concerned about the use of additional debt.
Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions.
1-11
Forms of Business Organization
Proprietorship
Partnership
Corporation
LLC and LLP
1-12
Proprietorships and Partnerships
Advantages Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages Difficult to raise capital
Unlimited liability
Limited life
1-13
Corporation
Advantages Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages Double taxation
Cost of set-up and report filing
1-14