Chapter 1 - Financial Management Learning Objectives Describe the “Cycle of Money” Distinguish the four main areas of finance Discuss financial.
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Chapter 1 - Financial Management Learning Objectives Describe the “Cycle of Money” Distinguish the four main areas of finance Discuss financial markets Discuss the financial management Identify the goal of finance Explain the interactions of a finance manager Delineate the forms of business Illustrate Agency Theory Review corporate governance and ethics
Finance Function Finance is about making decisions What and When to buy What and When to sell Art and Science of managing wealth Cycle of Money -- Moving Money From lenders to borrowers Returning money from borrowers to lenders See Diagram on Page 2
Cycle of Money Cycle of Money -- Moving Money Risk of return…compensation is interest Institutions Banks – Financial Intermediaries Takes on risk of nonpayment for a fee Advantage of Using Institution For lender – ready partner with known rates For lender – reduction or elimination of default risk For borrower – ready partner with known rates For both – reduction of search time
Finance Areas Corporate Finance Activities that support business operations Long and short term activities Investments Buying and Selling Securities Trading Rules and Regulations Financial Institutions – Banks, Insurance, Etc. International Finance Companies with operations in multiple countries Foreign governments and currency issues
Financial Markets Financial Markets – By Instrument Equity Markets – Stocks Debt Markets – Bonds and Loans Futures Markets – Futures Contracts Derivatives Markets – Calls and Puts Foreign Exchange Markets – Currencies Financial Markets – Other Categories Primary and Secondary Auction and Dealer Money Markets and Capital Markets (Maturity)
Financial Management Financial Managers Chief Financial Officer (CFO) Any individual making financial decisions YOU Finance Decision Areas Capital Budgeting (What to Buy or Sell) Capital Structure (How to finance the purchase) Working Capital Management (Daily operating levels) Goal – Maximize the wealth of the owner Maximize current share price Increase the current equity value of the company
Goal of Finance Closer Look at Financial Goal Net income or profits of the firm? Cash flow? Maximize Current Stock Price Trade-offs Safe and Happy Work Place Customers Happy Good Relationship with Surrounding Community Broad Definition of Stock Price Impact Social Welfare Job Security Ethical and Legal Actions
The Financial Manager in the Organization (Players) CEO Marketing Manager Finance Manager TreasurerController Investor Relations Manufacturing Manager Information Manager Human Resource Manager.
Types of Business Organizations Sole Proprietorships Simple and Most Common Personal Assets Co-mingled w/ Company Partnership Added capital and people Ownership Transfer difficult Corporation Legal Separate Entity Limited Liability of Owners (Stockholders)
Principal and Agent Setting Agency Theory Principal and Agent Agent works for and in the interest of the Principal Agent has personal interests as well Company and personal interests are not always aligned Principal (Owner) influences Agent Reward good behavior Punish bad behavior Problems with Observing Behavior (Effort) Adding costs to ensure appropriate behavior (effort) Agency costs
Corporate Governance Corporate Governance How a company conducts its business Fair and Honest vs. Exploiting Situations Laws and Regulations Designed to force fair and honest? Reaction to Exploiting Activities? Most Recent: Sarbanes - Oakley Reaction to Enron, World Com, etc.
Chapter 1 -- Homework Question #2 – Example of Cycle of Money Question #6 – Decisions in finance areas Question # 9 – Parent – Child Conflict Question #10 – Jackson Hole Employees Current agency cost Possible Solutions Possible Costs to each Solution Direct and Indirect Best choice?