1. 1 - 0 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Learning Goals: 1. Topics in Fin 350 2. Goal of financial decisions 3. Agency problem CHAPTER 1 Overview of Financial Management

2. 1 - 1 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Managerial Finance can be divided into two parts: 1. Short-term financial management 2. Long-term financial management Managerial Finance

3. 1 - 2 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Fin 340 covers short-term finance. Short-term finance includes: financial analysis and planning working capital management. Fin 340 Topics

4. 1 - 3 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Fin 350 covers long-term finance. Strategic decisions, with major implications for success or failure, including: ___________________________ Fin 350 Topics

5. 1 - 4 Copyright © 2002 by Harcourt College Publishers.All rights reserved. The basic goal of financial decisions is to maximize stockholder wealth. Why? Stockholders = owners. Investments are made to earn financial returns. Goal of Financial Decisions

6. 1 - 5 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Maximizing Shareholder Wealth Maximizing shareholder wealth considers: Cash flows Timing of cash flows Risk

7. 1 - 6 Copyright © 2002 by Harcourt College Publishers.All rights reserved. What are the social implications of maximizing stock price? Do efforts to maximize firm’s stock price have a negative on other stakeholders? In some cases, perhaps, but not necessarily.

8. 1 - 7 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Do managers always act in shareholders’ best interest? Not necessarily. A potential conflict of interest exists between managers and shareholders. The relationship between managers and shareholders is an example of an agency relationship.

9. 1 - 8 Copyright © 2002 by Harcourt College Publishers.All rights reserved. What is an agency relationship? An agency relationship arises whenever an individual or organization, called an agent, has decision-making authority affecting another party, or principal.

10. 1 - 9 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Agency relationships The basic agency relationship in corporate finance is the conflict of interest between shareholders and ___________________. In principle, managers should work in the interests of the owners. In fact, managers are also concerned with their personal well-being.

11. 1 - 10 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Agency relationships Can the agency conflict between shareholders and managers be resolved? Possibilities: Incentive-based compensation Threat of firing &/or hostile takeover (More…)

12. 1 - 11 Copyright © 2002 by Harcourt College Publishers.All rights reserved. Agency relationships Other agency relationships in finance: stockholders vs creditors managers vs creditors