Sld01 Goals and Func FM

C H

A P

T E

R

O N E

The Goals andFunctions of FinancialManagement

McGraw-Hill Ryerson McGraw-Hill Ryerson Limited 2000

th5

McGraw-Hill Ryerson Limited 2000

Foundations of FinancialManagement CANADIAN

E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

Trade-off

Daily

Cash management (receipt and disbursement of funds) Credit management

Inventory control Short-term financing Exchange and interest rate hedging Bank relations

Intermediate financingBond issuesLeasingStock issuesCapital budgetingDividend decisionsForecasting

Profitability

Risk

Goal:Maximizeshareholderwealth

PPT 1-1

Figure 1-1Functions of the Financial Manager

Occasional

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

Figure 1-2Prime rate versus percent change in the CPI

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

Sou rce : ww w.b ank-can ada .ca;www .statca n.ca

P

e

r

c

e

n

t

Consumer price index (average annual rate)Prime rate (December)

PPT 1-2

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

Chapter 1 - Outline LT 1-1

Definition of Financial Management

The Field of Finance

The Economic Environment

The Evolution of Finance

The Goals of Financial Management

Functions and Activities of Financial Management

Forms of Organization

Financial Markets

A Risk-Return Trade-Off

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

Financial Management LT 1-2

Financial Management (or Business Finance) isconcerned with managing a corporations money

For example, a company must decide:

where to invest its money

whether or not to replace an old asset

when to issue new stocks and bonds

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

The Field of Finance LT 1-3

Finance is related to:

Accounting, which provides data in financialstatements

Economics, which provides

decision-making tools such as pricing theory(supply and demand), risk analysis,comparative return analysis

information on the economic and financialenvironment in which the company operates

Abah2Highlight

Abah2Highlight

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

The Economic Environment LT 1-4

The financial managerconsiders

inflation

unemployment

industrial production

domestic andinternational competition

foreign trade statistics

international capitalflows

exchange rates

changes in technology

consumer and investorattitudes

the state of financialmarkets

changes in governmentpolicy

etc. etc.

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

The Evolution of Finance LT 1-5

The Exchanges develop

1920s: raising capital

1930s: capital preservation, bankruptcy andreorganization

1950s: shift to analytical decision-making, capitalbudgeting

Markowitz, Modigliani and Miller, Sharpe, Merton,Scholes Agency Theory

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

The Goals of Financial Management LT 1-6

Primary goal is to maximize the long-term wealth of thecompanys shareholders (owners) by increasing the marketvalue (price) of their shares

May conflict with

social / ethical goals (for example, pollution control)

interests of management (for example, short-termcompensation)

Management can encourage an increase in share price byearning an attractive return at an acceptable level of risk

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

Functions and Activitiesof Financial Management LT 1-7

Functions involve: raising funds for the firm at minimal cost and acceptable risk

investing those funds in company assets so as to earn an attractive return given acceptable risks

Activities include: Working Capital Management

short-term (S/T) financial decisions (1 year)

ex., purchasing a new machine in the future

Financing decisions how to raise money

loans? leases? shares? bonds?

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

Forms of Organization LT 1-8

Sole Proprietorship single owner with unlimited liability.

limited access to capital

Partnership 2 or more owners (partners)

greater access to capital

Corporation smallest in actual number but largest in total sales revenue and

profits

owned by the shareholders

large corporation can raise money by selling more shares or bonds

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

Financial Markets LT 1-9

Global network of corporations, financial institutions, governmentsand individuals that either need money or have money to lend or invest

Money markets deal in short-term securities (

th5



E D I T I O N

F

I

F

T

H

McGraw-Hill Ryerson

BlockHirt

Short

A Risk-Return Tradeoff LT 1-10

Profitability Risk

Profitability Risk

ex., investing in stocks vs.savings accounts

Stocks may be more profitable but are riskier

Savings accounts are less profitable and less risky(or safer)

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Abah2Highlight

Sld01 Goals and Func FM

Documents

Transcript of Sld01 Goals and Func FM