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Introduction to Financial Management

The document provides an introduction to financial management. It discusses that finance involves evaluating capital investments and raising funds to purchase investments. The goals of financial management for a firm are to decide long-term investments and funding sources, manage daily financial activities, and maximize shareholder wealth over time while considering the level, timing, and risk of cash flows. It also discusses agency problems that can arise between shareholders and management.

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6 views15 pages

Introduction to Financial Management

The document provides an introduction to financial management. It discusses that finance involves evaluating capital investments and raising funds to purchase investments. The goals of financial management for a firm are to decide long-term investments and funding sources, manage daily financial activities, and maximize shareholder wealth over time while considering the level, timing, and risk of cash flows. It also discusses agency problems that can arise between shareholders and management.

Uploaded by

mad2k
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

CHAPTER ONE

INTRODUCTION TO subtitle style Click to edit Master FINANCIAL MANAGEMENT

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What is Finance?

Essentially, finance is the study of how capital investments are evaluated and how funds are raised to purchase the investments.

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Financial Management
1.

What long-term investments should the firm undertake? (capital budgeting decisions) How should the firm fund these investments? (capital structure decisions)

2.

3.

How will the firm manage its everyday financial activities? (working capital management 4/21/12 decisions)

Financial Manager

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Financial Manager

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Legal Forms of Business Organization

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The goal of financial management

The goal of the financial manager must be consistent with the mission of the corporation. What are among the possible goals? Survive, avoid bankruptcy, maximize sales, maximize profits, maintain growth. The appropriate goal: To maximize shareholders wealth (as measured by current value per share of the existing stock) Why?

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The goal of financial management

Because maximizing shareholder wealth properly considers cash flows, the timing of these cash flows, and the risk of these cash flows.
level & timing of cash flows

Share Price = Future Dividends Required Return


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risk of cash flows

The agency problems

Agency problem is the possibility of conflict of interest between the stockholders and management of a firm Example:

Not pursuing risky project for fear of losing jobs, stealing, expensive perks.

Agency costs associated with the agency problems will reduce the firm value.
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How to Reduce Agency Costs?


1.

Monitoring (Examples: Reports, Meetings, Auditors, board of directors, financial markets, bankers, credit agencies)

1.

Compensation plans (Examples: Performance based bonus, salary, stock options (ESOS), benefits)

1.

Others

(Examples: Threat of being fired, 4/21/12 Threat of takeovers, Stock market,

Financial markets & institutions

Primary Market

Market in which new issues of a security are sold to initial buyers.

Secondary Market

Market in which previously issued securities are traded.


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Financial markets and institutions


Investment in Current assets Corporatio Fixed assets

cas h securit ies reinve st


Cash flow ta x Dividend s

Financial markets
Short-term debt Long-term debt Equity shares

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Governmen t

Principles underlying the financial management

PRINCIPLE 1: Money Has a Time Value. PRINCIPLE 2: There is a Risk-Return Trade-off. PRINCIPLE 3: Cash Flows Are The Source of Value. PRINCIPLE 4: Market Prices Reflect Information.
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