th 9 ©the mcgraw-hill companies, inc. 2000 foundations of financial management e d i t i o n n i n...
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th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
N I N
T H
Irwin/McGraw-Hill
BlockHirt
11Chapt
er
Chapt
er
The Field of FinanceThe Field of Finance
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
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Chapter 1 – Outline
• Definition of Finance• Short-Term vs. Long-Term Financing Decisions• Risk-Return Trade-Off• Financial vs. Real Capital• Stocks vs. Bonds• Forms of Organization
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
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BlockHirt
Finance is closely related to Economics
th9
©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
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Irwin/McGraw-Hill
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Economics provides a structure for decision making in areas such as
– Risk analysis
– Pricing theory
– Comparative return analysis
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©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
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Economics gives us a broad picture of economic environment, which includes
– Federal Reserve and banking system
– Economic variables• Gross Domestic Product• Industrial Production• Disposable Income• Unemployment• Inflation• Interest rates• Taxes
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Foundations of Financial ManagementE D I T I O N
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Finance is closely related to Accounting
• Accounting provides the financial data we use
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©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
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There are many careers in Finance• Corporate finance officer
• Banker
• Stockbroker
• Financial analyst
• Portfolio manager
• Investment banker
• Financial consultant
• Personal financial planner
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©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
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Finance has evolved over time (next)
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Foundations of Financial ManagementE D I T I O N
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Finance emerged at the turn of the century
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Foundations of Financial ManagementE D I T I O N
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1930s—the depression caused finance to focus on
– preservation of capital
– maintenance of liquidity
– Corporate reorganizations
– Bankruptcy process
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Foundations of Financial ManagementE D I T I O N
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Mid 1950s—finance became more analytical
– Allocating financial capital (money)
– For the purchase of real capital (long-term plant and equipment)
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Financial capital vs. Real capital
Financial Capital (or Accounting Capital) = money
Real Capital (or Economic Capital) = plant and equipment
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Recent Issues in Finance
• The risk-return relationship
• Capital structure theory (Merton and Miller)
• Effects of inflation and disinflation
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©The McGraw-Hill Companies, Inc. 2000
Foundations of Financial ManagementE D I T I O N
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Trade-off
Daily
Credit managementInventory controlReceipt and disburse-ment of funds
Occasional
Stock issueBond issueCapital budgetingDividend decision
Profitability
Risk
Goal:Maximizeshareholderwealth
T 1-1
Figure 1-1Functions of the Financial Manager—Page 8
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Forms of Organization
Sole Proprietorship (largest in actual number but smallest in total sales revenue)
• Partnership
• Corporation (smallest in actual number but largest in total sales revenue)
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Goals of Financial Management (next several slides)
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Agency Theory—examines the relation between owners and managers of the firm.
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Institutional Investors—own larger fractions of firms over time.
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The ultimate measure of performance is NOT what the firm earns, but how the earnings are valued by the investor.
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While many goals are possible, the official goal of the financial manager is TO MAXIMIZE SHAREHOLDER WEALTH.
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As investor attitudes and preferences change, managers must focus on different things to maximize shareholder wealth.
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Foundations of Financial ManagementE D I T I O N
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Here are reasons for management to maximize shareholder wealth.• Poor stock price performance can
lead to undesirable takeovers and proxy fights
• Management often has incentives such as stock and options.
• Powerful institutional investors force management to be responsible.
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Foundations of Financial ManagementE D I T I O N
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Social Responsibility and Ethical Behavior
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In most cases, wealth maximization is consistent with social responsibility.
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Sometimes, wealth maximization leads to socially undesirable results:• Pollution• Equitable hiring practices• Insider trading
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The Role of Financial Markets
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Financial markets are meeting places for people, corporations and institutions to lend or invest money.
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Public financial markets—markets for national, state, and local governments.
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Corporate financial markets—markets for businesses to raise money.
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Foundations of Financial ManagementE D I T I O N
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Short-Term vs. Long-Term Financing
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Working Capital is concerned with short-term (S/T) financing decisions <1 year (money markets)ex., managing cash and other current assets
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Capital Budgeting is concerned with long-term (L/T) financing decisions >1 year (capital markets)ex., purchasing a new machine in the future
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Primary Markets—Refers to the market when private individuals purchase securities from the corporation—corporations raise funds.
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Secondary Markets—When investors trade among themselves.
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Institutions force many types of restructuring.• Changes in capital structure
• Selling lower-profit business entities.
• Removal of ineffective management.
• Mergers and acquisitions.
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Internalization of the Financial Markets
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Increasingly, we are seeing the emergence of international trade.
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Many companies are truly global companies today.
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Foundations of Financial ManagementE D I T I O N
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Students should be aware of this trend and adjust their educations:• Learn one or more foreign
languages.• Take courses in international
business.• Learn about other cultures and
people.• Look for work experience that
teaches global business.