1. AN OVERVIEW OF MANAGERIAL FINANCE
CHAPTER 1
AN OVERVIEW OF MANAGERIAL
FINANCE
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2. Finance is the Science and Art of Managing Money
What is Finance?
Finance is the Science and Art of Managing Money
Finance Deals with Decisions about How to:
Raise Money
Invest Money
Spend Money
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3. Finance is important For every body (How): When you want to
borrow to buy a car or a house
retire ( the amount of payment you receive)
start your own business
invest your money
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4. Finance and other disciplines: Finance is closely related to:
Management
Marketing:
Information Systems
Accounting
Economics
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5. Differences between Finance & Accounting:
Accounting Finance
Gathering & Presenting Decision Making
Accounting Information
Accrual Concept Cash Concept
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6. On December 20, 2006, Gulf Co. generated sales of $1,000,000 on credit to be paid after 30 days ( Jan , 19, 2007).
Dec,20,2006
Account Receivables $1,000,000
Sales $1,000,000
January 19,2007
Cash $1,000,000
Account Receivables $,1000,000
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7. Finance consists of three interrelated areas
Financial Markets and Institutions
Investments
Managerial Finance) Role of Finance within a Business Organization (
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8. Forms of Business Organizations
(Proprietorship, Partnership, Corporation)
Proprietorship
A business owned by one Individual.
Partnership
A business owned by two or more than two persons.
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9. A corporation is a legal entity created By law.
it is separate and distinct from its owners and managers.
Money contributed to start a corporation is called capital stock and is divided into shares.
The owners of the corporation are called stockholders or shareholders.
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10. Corporation enjoys four major advantages: 1. Limited Liability
2. Permanency
3. Liquidity
4. Ability to Raise Capital
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11. Role of Finance in a typical Business Organization
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12. Stockholders BOD President (CEO) VP-Marketing VP- Finance
VP-Production
Treasurer
Controller
Accounting
Functions
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13. Marketable Securities
Treasurer
Capital Budgeting
Managing Cash &
Marketable Securities
Managing Risk
Capital Structure
Managing Inventory
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14. Responsibilities & Functions of the Financial manager
Forecasting & Planning
Investment & Financing Decisions
Coordination & Control
Dealing with Financial Markets
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15. The goals of the Corporation The management primary goal is:
stockholder wealth maximization
This is translated into maximizing the value of the firm as measured by the price of the firm’s common stock.
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16. Stockholder Wealth Maximization Stock Price Maximization
The Goals of the Corporation
Stockholder Wealth Maximization
Stock Price Maximization
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17. Social Responsibility
The concept that businesses should be
Actively concerned with the welfare of society at large.
Businesses are responsible for the welfare of their employees, customers, and the communities in which They operate?
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18. Stock Price Maximization and Social Welfare
Actions that maximize stock prices are
consistent with social welfare. STPM requires:
Company to produce high quality goods and services at the lowest possible cost.
The development of products that consumers want and need.
Requires efficient and courteous services, adequate stocks of merchandise and good location.
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19. Wealth maximization (Value) Management must consider the following
factors in its attempt to maximize wealth:
Projected earnings per Share (EPS)
rather than profit maximization,
Timing of the earnings stream,
Riskiness of the projected earnings,
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20. Management must consider the following
factors in its attempt to maximize wealth
Projected earnings per Share (EPS)
rather than profit maximization,
b. Timing of the earnings stream,
c. Riskiness of the projected earnings,
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21. Gulf Star reported net income of $200,000
for Gulf has 100,000 shares outstanding.
You own shares. So your share of the
earnings is $200.
During 2006, the company issued 25,000 more
shares and reported net income of $220, The
earnings per share is:
$220,000/125,000 = $1.76/share.
Your share of the earnings is $1.76x100= $176
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22. Timing of the earnings stream
( increase in profits Million)
YEAR YEAR2 TOTAL
Project A
Project B
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23. Riskiness of the projected earnings
Project A- very safe project and is expected
to raise earnings by $1.0 per share.
Project B - very risky project and is expected
to raise earnings by $2.00 per share.
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24. Agency Relationships Exist between: Stockholders and managers and
Agency relationship exists when one or more
people ( the principals) hire another person
(the agent) to perform a service and then
Delegate decision-making authority to that
agent.
Agency Relationships Exist
between:
Stockholders and managers and
Stockholders and creditors
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25. Stockholders versus Managers Agency relationship that exist between
stockholders and mangers gives rise to
what so called agency problem.
Agency problem: the likelihood that mangers place personal goals ahead of corporate goals.
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26. Mechanisms available to make mangers to
act in the shareholders’ Best interest?
1. Structuring Managerial Incentives
. Performance shares
. Executive stock option
2. Shareholder intervention (The threat of firing)
3. The threat of takeover
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27. Stockholders versus Creditors Conflicts between stockholders and
Creditors result from:
Actions taken by stockholders that jeopardize the interest of the creditors
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28. Creditors lend funds to the firm at
rates that are based on the following
factors:
The riskiness of the firm’s existing assets
The riskiness of future asset additions
Firm’s existing capital structure
Future capital structure
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29. The goal of wealth maximization requires fair play with creditors
Stockholder wealth depends on continued access to capital market and abiding by both the letter and the sprit of credit agreements.
Managers as agents of both the creditors and the stockholders, must act in a manner that is fairly balanced between the interests of these two parties
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30. Stakeholders Individuals or entities that have an interest in
the well-being of a firm, including:
a. Stockholders, b. Creditors, c. Employees
d. Customers and ,e. Suppliers
Maximizing shareholder wealth requires the fair treatment of all stakeholders
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