Download - Intro
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Maximize Shareholders’ Wealth and Welfare
Financial Management
Investment Decision
Financial Decision
Dividend Decision
A Framework for Financial Decision-Making
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Major Decisions by Financial Manager
• Investment Decision – what assets to own? What mix of fix assets? What mix of current assets?
• Financing Decision – what securities to issue? What mix of short-term credit, long-term debt and equity?
• Dividend Decision – what percentage of earnings should be given out in cash? Or should it be given out as stocks?
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Board of Directors
President
VP for Mktg. VP for Finance VP for Prodn/Opn
Treasurer•Cash Mgmt•Customer Credit and Collection•Inventory•Capital Budgeting•Raising of ST and LT Funds
Controller•Cost Acctg.•Financial Acctg.•Internal Auditing•Budgeting•Payroll•Taxes
The Financial Function (by R.K.S. Rao)
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Profit Maximization vs. Wealth Maximization(taken from Fundamentals of Financial Mgmt by R.K.S. Rao)
Alternative A:Co. A sells the rights to gold mining on its land to Co. B, for $100M in cash. However, the rights expire in 30 years and Co. A must spend an estimated $101M to eliminate environmental damage caused by the mining operation.Alternative B:Co. A can buy the mining equipment for $150M today and do its own mining and get $151M after 30 years after clean-up. Note that Co. A has no experience in mining.
Maximize Shareholders’ Wealth
Maximize Price of the Firm’s or Company’s Stock
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Weaknesses of Profit Maximization(taken from Fundamentals of Financial Mgmt by R.K.S. Rao)
• Difficulty of incorporating risk in a profit based criterion.
• Too much emphasis on profit overshadows the timing when the returns could or would be obtained.
• Profit is an accounting measure that may not necessarily reflect the economic realities of a firm. It is a book concept that is sensitive to how accounting books of the company are kept.
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Cash flow calculation not only recognize profits but go a little further and measure the actual cash available for the firm. It captures the economic impact of managerial decisions.
Profits have no earning potential; cash flow does.
Cash Flow
Price of the Firm’s or Company’s Stock
Determines