Chapter 1
The
The Role
Role of
of Financial
Financial
Management
Management
1.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
The Role of
Financial Management
• What is Financial Management?
• The Goal of the Firm
• Corporate Governance
• Organization of the Financial
Management Function
1.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
What is Financial
Management?
Concerns the acquisition,
financing, and
management of assets
with some overall goal in
mind.
1.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Investment Decisions
Most important of the three
decisions.
• What is the optimal firm size?
• What specific assets should be
acquired?
• What assets (if any) should be
reduced or eliminated?
1.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Financing Decisions
Determine how the assets (LHS of
balance sheet) will be financed (RHS
of balance sheet).
• 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?
1.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Asset Management
Decisions
• How do we manage existing assets
efficiently?
• Financial Manager has varying degrees
of operating responsibility over assets.
• Greater emphasis on current asset
management than fixed asset
management.
1.6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
What is the Goal
of the Firm?
Maximization of
Shareholder Wealth!
Value creation occurs when
we maximize the share price
for current shareholders.
1.7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Corporate Social
Responsibility Discussion
Corporate Social Responsibility (CSR): A business
outlook that acknowledges a firm’s responsibilities to
its stakeholders and the natural environment.
Sustainability: Meeting the needs of the present without
compromising the ability of future generations to meet
their own needs.
1.8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Strengths of Shareholder
Wealth Maximization
• 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.
1.9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
The Modern Corporation
Modern Corporation
Shareholders Management
There exists a SEPARATION
between owners and managers.
1.10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Role of Management
Management acts as an agent
for the owners (shareholders)
of the firm.
• An agent is an individual
authorized by another person,
called the principal, to act in
the latter’s behalf.
1.11 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Agency Theory
• Jensen and Meckling developed
a theory of the firm based on
agency theory.
theory
• Agency Theory is a branch of
economics relating to the
behavior of principals and their
agents.
1.12 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Agency Theory
• Principals must provide incentives
so that management acts in the
principals’ best interests and then
monitor results.
• Incentives include, stock options,
perquisites, and bonuses.
bonuses
1.13 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Corporate
Social Responsibility
• Wealth maximization does not
preclude the firm from being socially
responsible at the corporate level.
• Assume we view the firm as producing
both private and social goods.
• Then shareholder wealth maximization
remains the appropriate goal in
governing the firm.
1.14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Corporate Governance
• Corporate governance: represents the
system by which corporations are
managed and controlled.
• Includes shareholders, board of
directors, and senior management.
• Then shareholder wealth maximization
remains the appropriate goal in
governing the firm.
1.15 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Organization of the Financial
Management Function
Board of Directors
President
(Chief Executive Officer)
Executive Vice Executive Vice Executive Vice
President President President
(Operations) (Finance - CFO) (Marketing)
1.16 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
Organization of the Financial
Management Function
EVP of Finance
Vice President (Treasurer) Controller
• Capital Investment • Cost Accounting
• Cash Management • Cost Management
• Commercial/investment • Data Processing
banking relationships • General Ledger
• Credit Management • Government Reporting
• Dividend Disbursement • Internal Control
• Financial Analysis/Planning • Preparing Financial
• Investor Relations Statements
• Mergers and Acquisitions • Preparing Budgets
• Pension Management • Preparing Forecasts
• Insurance/Risk Management
• Tax Analysis/Planning
1.17 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.