CHAPTER 1 An overview of Managerial Finance

What is Financial Management Is the ability to adapt to change, raise funds, invest in assets, and manage wisely in order to attend the success of the firm. It is concerned with the acquisition, financing, and management of assets with some overall goal in mind. Involves management of money flowing into the organization (inflows) as well as money flowing out of the organization (outflows) Uses various accounting and financial information and makes economic analysis for making future decisions to meet the organization's financial objectives.

Investment Decision: determination of the total amount of assets needed to be held by the firm. The composition the assets Financing Decision : decision regarding the source of Financing : debt/ equity Dividend – payout ratio Asset Management decision: Operating responsibility of the asset

Sources of Funds Debt Financing  Funds obtained through borrowing Equity Financing  Funds provided in exchange for some ownership in the firm usually shares (while shares represent the partial ownership of the organization).

Career Opportunities in Finance Financial Market and Institutions: Includes banks, insurance companies, savings and loans and credit unions Knowledge: Factors that causes interest rate to rise and fall, the regulation to which financial institution are subject to and various types of financial instruments. Investments: Stock brokerage firms, banks, investment companies or insurance companies. Functions: sales; analysis of individual securities, and creating a good portfolio for a given investor. Managerial Finance: Both public and private corporations, deal with financial services or are manufacturers. Functions: ranges from making decision regarding plant expansion to choosing what types of securities to issue finance expansion.

Primary Responsibilities of Financial Management Increasing return to maximize the current value of cash inflows. Reducing cost to minimize the current value of cash outflows. Both roles will in turn, help maximize the value of the firm.

Time basis  Short-term functions: functions whose results are expected with in a one-year time period.  Long-term functions: functions with effect extend beyond one year. Activity basis  Investment functions: Money employed in resources to earn future return.  Financing functions: money mobilised from sources for investment. Functions of Financial Management

Functions of Financial Management Contd. Short-termLong-term Inv est me nt Working Capital Management  Cash & marketable securities  Receivables  Inventory Capital budgeting Valuation Cost of capital Capital Structure Dividend Policy Fin anc ing  Accruals  Trade credit  Bank loans and commercial Papers  Receivables and inventory Common stock Preferred stock Bond Long-term bank loans Lease

Goal of Financial Management What should be the goal of a corporation? ◦ Maximize profit? ◦ Minimize costs? ◦ Maximize market share? ◦ Maximize the current value of the company’s stock? Does this mean we should do anything and everything to maximize owner wealth?

The Goal of the Firm Maximize the wealth of the firm’s present owners. Shareholder wealth is represented by the market price per share of the firm’s common stock, which in turn is a reflection of the firm’s investment, financing, and asset management decisions. Value Creation Profit maximization: Maximizing a firm’s earnings after taxes ( EAT) Earning per share (EPS) Earning after taxes ( EAT) divided by the number of common shares outstanding. Social Responsibility: The concept that business should be actively concerned with the welfare of society at large. Maximizing market price per share takes into account present and expected future earning per share: the timing, duration, and risk of these earnings: the dividend policy of the firm, capital structure and other factors that bear on the market price of the stock. It serves as a barometer for business performance; it indicates how well management is doing on behalf of its shareholders.

Factors determining the stock price; 1.Projected earning per share 2.Timing of the earnings stream 3.Riskiness of the projected earnings 4.Use of Debt 5.Dividend Policy.

The Agency Problem Agency relationship  Principal hires an agent to represent their interest  Stockholders (principals) hire managers (agents) to run the company Agency problem  Conflict of interest between principal and agent Management goals and agency costs

Agency Relationship An 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 Problem: The owner- manager might now decide not to work as hard to maximize shareholder wealth because less of this wealth will go to him or her, or decide to take a higher salary or enjoy more perquisites because part of those costs will fall on the outside shareholders.

Manager’s motivation to act in the shareholder’s best interest 1.The threat of firing 2.The Threat of takeover 3.Structuring managerial incentives Corporate Governance: The system by which corporations are managed and controlled. It encompasses the relationships among a company’s shareholders, board of directors, and senior management.

Reasons for firms going International 1.To seek new markets 2.To seek raw materials 3.To seek new technology 4.To seek production efficiency 5.To avoid trade barriers

Domestic Firms Vs multinational corporations 1.Different currency denominations 2.Economic and legal ramifications 3. languages 4.Cultural differences 5.Role of government 6. Political risk