FOUNDATIONS OF FINANCIAL MANAGEMENT Ohio University College of Business

How do we learn?  There are primarily seven ways

How do we learn? 1. Discussion 2. Practice doing 3. Reading 4. Lecture 5. Audiovisual 6. Teach others 7. Demonstration

What do you think of when someone says “finance”?

 We need money to live (food, clothing, shelter) and we probably want money for a great number of things (concert tickets, cars, computers, etc.).  Run your own firm - how to invest and how to raise money.  Teaches us to understand the other side of every transaction. If you understand what your employer wants, it is easier to achieve this and hence you are in a better position for raises and promotions. Why is finance important personally?

 Few people will not work their entire life at the same firm. Knowing in advance your financial position and options dramatically reduces your stress in this time of change.  Taxes can take 40% of what we earn. Making the right investments can cut this tax burden.  Star athletes have gone from making millions to flat broke. Why is finance important personally?

US Fiscal Condition United States Tax revenue: $2,170,000,000,000 Fed budget: $3,820,000,000,000 New debt: $1,650,000,000,000 National debt: $14,271,000,000,000 Recent budget cut: $38,500,000,000

Make the #s relevant Annual family income: $21,700 Money the family spent: $38,200 New debt on the credit card: $16,500 Outstanding balance on credit card: $142,710 Total budget cuts: $385

How is Finance related to other fields?  Marketing  Budgets, marketing research, marketing financial products  Accounting  Dual accounting and finance function, preparation of financial statements  Management  Strategic thinking, job performance, profitability  Personal finance  Budgeting, retirement planning, college planning, day-to- day cash flow issues

Daniel Pink – Does $ Increase Performance?

Finance: The Art and Science of Managing Money

Finance Utilizes?  Economics  Accounting

Financial analysis is like a…

Analyst’s opinion of GM Dec 07 Strong Buy4 Buy3 Hold7 Underperform3 Sell1

What do you see?

Count every “F” below? FINISHED FILES ARE THE RE SULT OF YEARS OF SCIENTI FIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS...

What number goes in the triangle?

Organizations that hire Finance Grads  Banks  Insurance Companies  Any Large Business  Investment Bankers  Stockbrokers

Careers in Finance  Commercial Banking  Financial Planning  Insurance  Real Estate  Money Management  Corporate Finance

Overview of Semester  Intro to Finance  Accounting Review  Financial Statement Analysis  Time Value of Money  Capital Budgeting  Stock and Bond Valuation

CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT  Forms of Businesses  Goals of the Corporation  Agency Relationships  Ethics in Finance

Key Concepts and Skills Have a good understanding of:  The basic types of financial management decisions and the role of the financial manager  The goal of financial management  The financial implications of the different forms of business organization  The conflicts of interest that can arise between owners and managers

Basic Areas Of Finance 1. Corporate finance = Business Finance 2. Investments 3. Financial institutions 4. International finance

Investments  Work with financial assets such as stocks and bonds  Value of financial assets, risk versus return, and asset allocation  Job opportunities  Stockbroker or financial advisor  Portfolio manager  Security analyst

Financial Institutions  Companies that specialize in financial matters  Banks – commercial and investment, credit unions, savings and loans  Insurance companies  Brokerage firms  Job opportunities

International Finance  An area of specialization within each of the areas discussed so far  May allow you to work in other countries or at least travel on a regular basis  Need to be familiar with exchange rates and political risk  Need to understand the customs of other countries; speaking a foreign language fluently is also helpful

Why Study Finance?  Marketing  Budgets, marketing research, marketing financial products  Accounting  Dual accounting and finance function, preparation of financial statements  Management  Strategic thinking, job performance, profitability  Personal finance  Budgeting, retirement planning, college planning, day-to- day cash flow issues

Business Finance  Some important questions that are answered using finance  What long-term investments should the firm take on?  Where will we get the long-term financing to pay for the investments?  How will we manage the everyday financial activities of the firm?

Financial Manager  The top financial manager within a firm is usually the Chief Financial Officer (CFO)  Treasurer – oversees cash management, credit management, capital expenditures, and financial planning  Controller – oversees taxes, cost accounting, financial accounting, and data processing

Financial Management Decisions  Capital budgeting  What long-term investments or projects should the business take on?  Capital structure  How should we pay for our assets?  Should we use debt or equity?  Working capital management  How do we manage the day-to-day finances of the firm?  Financial managers try to answer some, or all, of these questions

Forms of Business Organization Three major forms in the United States Sole proprietorship Partnership General Limited Corporation S-Corp Limited liability company (LLC)

Sole Proprietorship  Advantages  Easiest to start  Least regulated  Single owner keeps all of the profits  Taxed once as personal income  Disadvantages  Limited to life of owner  Equity capital limited to owner’s personal wealth  Unlimited liability  Difficult to sell ownership interest Business owned by one person

Partnership  Advantages  Two or more owners  More capital available  Relatively easy to start  Income taxed once as personal income  Disadvantages  Unlimited liability  Partnership dissolves when one partner dies or wishes to sell  Difficult to transfer ownership Business owned by two or more persons

Corporation  Advantages  Limited liability  Unlimited life  Separation of ownership and management  Transfer of ownership is easy  Easier to raise capital  Disadvantages  Separation of ownership and management (agency problem)  Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible) A legal “person” distinct from owners and a resident of a state

International Corporate Forms  All of these forms feature public ownership and limited liability

Financial Goals of the Corporation  The primary financial goal is _______________.

Goal Of Financial Management  What should be the goal of a corporation?  Maximize the market value of the existing owners’ equity  Maximize the current value per share of the company’s existing stock

Goal Of Financial Management  Does this mean we should do anything and everything to maximize owner wealth?  Outsourcing?  Off-shoring?  Enron?  Corporate support of charities?

Why not maximize profits?

Is stock price maximization the same as profit maximization?  No, despite a generally high correlation amongst stock price, EPS, and cash flow.  Some actions may cause an increase in earnings, yet cause the stock price to decrease (and vice versa).

The goal of the financial manager is to maximize the value of the firm.

What determines a firm’s value?  A firm’s value is the present value of all future cash flows.

Market Capitalizations AFLAC Inc. Apple Inc. Best Buy Co., Inc. Exxon Mobil Corporation Ford Motor Co. Google Inc. Microsoft Corporation Starbucks Corporation Wal-Mart Stores Inc.

Apple Inc.481B Exxon Mobil429B Google Inc.375B Microsoft Corporation293B Wal-Mart Stores Inc.250B Ford Motor Co.63B Starbucks Corporation56B AFLAC Inc.30B Best Buy Co., Inc.12B

What is Ethical Behavior?  Ethical behavior tends to be good for business and involves demonstrating respect for key moral principles that include honesty, fairness, equality, dignity, diversity and individual rights.

Agency relationships  An agency relationship exists whenever a principal hires an agent to act on their behalf.

Agency relationships  An agency relationship exists whenever a principal hires an agent to act on their behalf.  Within a corporation, agency relationships exist between:  Shareholders and managers

Shareholders versus Managers  Managers are naturally inclined to act in their own best interests.  But the following factors affect managerial behavior:  Stock option plans  The threat of firing (Board of Directors, large stockholder, other managers)  The threat of takeover

There's No Such Thing As "Business" Ethics : There's Only One Rule for Making Decisions

Sarbanes-Oxley Act of 2002  Major focus is to make sure that publicly-traded corporations accurately present their financial statements.  Longer jail sentences  Made CEOs responsible for the fin. stmts.

Sarbanes-Oxley Act  Driven by corporate scandals  Enron, Tyco, WorldCom, Adelphia  Intended to strengthen protection against accounting fraud and financial malpractice  Compliance very costly  Firms driven to: Go public outside the U.S. Go private (“go dark”)