GBUS502 Vicentiu Covrig 1 An overview of Financial Management An overview of Financial Management (chapter 1)

GBUS502 Vicentiu Covrig 2 Career Opportunities in Finance Financial management/ Corporate finance Investments Money and capital markets

GBUS502 Vicentiu Covrig 3 Finance Within the Organization Board of Directors Chief Executive Officer (CEO) Chief Operating Officer (COO) Marketing, Production, Human Resources, and Other Operating Departments Chief Financial Officer (CFO) Accounting, Treasury, Credit, Legal, Capital Budgeting, and Investor Relations

GBUS502 Vicentiu Covrig 4 Alternative Forms of Business Organization: Sole proprietorships & Partnerships Sole proprietorship: un unincorporated business owned by one individual Partnership: un unincorporated business owned by two or more individuals Advantages - Ease of formation - Subject to few regulations - No corporate income taxes Disadvantages - Difficult to raise capital - Unlimited liability - Limited life

GBUS502 Vicentiu Covrig 5 Corporation Corporation Advantages - Unlimited life - Easy transfer of ownership - Limited liability - Ease of raising capital Disadvantages - Double taxation - Cost of set-up and report filing

GBUS502 Vicentiu Covrig 6 Role of Finance in a Typical Business Organization

GBUS502 Vicentiu Covrig 7 Stock Prices and Shareholder Value  The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price.  Value of any asset is present value of cash flow stream to owners.  Most significant decisions are evaluated in terms of their financial consequences.  Stock prices change over time as conditions change and as investors obtain new information about a company’s prospects.

GBUS502 Vicentiu Covrig 8 Stock Prices and Intrinsic Value  In equilibrium, a stock’s price should equal its “true” or intrinsic value.  Intrinsic value is a long-run concept.  To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value.  Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run. 1-8

GBUS502 Vicentiu Covrig 9 Conflicts Between Managers and Stockholders  Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders).  But the following factors affect managerial behavior:  Managerial compensation packages  Direct intervention by shareholders  The threat of firing  The threat of takeover

GBUS502 Vicentiu Covrig 10 Conflicts Between Stockholders and Bondholders  Stockholders are more likely to prefer riskier projects, because they receive more of the upside if the project succeeds. By contrast, bondholders receiving fixed payments are more interested in limiting risk.  Bondholders are particularly concerned about the use of additional debt.  Bondholders attempt to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions.

GBUS502 Vicentiu Covrig 11 Factors that affect stock price Projected cash flows to shareholders Timing of the cash flow stream Riskiness of the cash flows