Contemporary

FinancialManagement
8thEdition
by
Moyer,McGuigan,andKretlow
Prepared by
Tom Peacock
University of Houston

2001 South-Western College Publishing

 Chapter 1
The Role and Objective
of
Financial Management
Questions Faced in Finance

How is finance related to other fields of

study?
What are the goals and objectives of
financial managers?
How has the finance field evolved?
How is the finance field changing today?

3
Principal Forms of Business
Organizations
Sole proprietorship
Partnership
Corporation

4
Sole Proprietorship

Owned by one person

Easy formation advantage
Unlimited liability disadvantage
Difficulty raising funds disadvantage
Represent 75% of all businesses
Account for < 6% of the $ volume

5
Partnership

Owned by two or more persons

Classified as general or limited
Partnership dissolves when a general
partner dies

6
Liability of Partners

General Partner
Has unlimited liability for all obligations of the
business
Limited Partner
Liability limited to the partnership agreement

7
Corporation

Limited liability Legal entity

Permanency Have a board of
Flexibility directors
Ability to raise of Owners are
capital stockholders
Easy marketability of
shares of ownership

8
Stockholders
electaboard
ofdirectors
Boardof
directors
thenhire
management
(officers)
9
Who Manages ?

Board of directors Management makes

deals with broad most of the decisions
policy

10
Stockholder Rights
Dividend Asset
Voting Preemptive

Corporate Securities
in Order or Priority
Bonds ( highest)
Preferred stock
Common stock ( C/S ) ( lowest )

11
Optimal Form of Organization
Influenced by
Cost Raising capital
Complexity Decision making
Liability Tax considerations
Continuity

12
 Objective
of
FinancialManagement
Shareholder
(FM)
Wealth
Maximization
Objectiveofthe (SWM)
financialmanager

NOT
profitmaximization
Doesnotconsider
timevalueofmoney

13
SWM

Considers the timing and risk of the benefits

from stock ownership
Determines that a good decision increases
the price of the firm's common stock (c/s)
Is an impersonal objective
Is concerned for social responsibility

14
Social Responsibility
Ethical issues will constantly confront
financial managers as they achieve the goal
of the firm ( SWM ).
Managers Must
Avoid personal conflicts
Maintain confidentiality
Be objective
Act fairly

15
 Agency Relationships / Problems
Owners(shareholders)
Problem created
by separation of
Managementand
Employees
Management may maximize
its own welfare instead
of the owners wealth

Jobsecurity

16
Job Security

Management decisions based on retaining

management rather than SWM
Example
Example A decision to retain suppliers
rather than selecting new suppliers providing
higher quality or lower cost
Why
Why If the transition is mishandled
management will be scrutinized but if no
change is made the issue will be ignored

17
Agency Costs

Management incentives
Monitor performance
Owners protection
Complex organization structures

RecentTrends
Toflattenorganizationstructurestocutcosts
18
 Owners
Problem created by
separation of Management

Owners
Asimilarproblem
Creditors

Protectivecovenants
inloanagreements

19
Examples of Protective Covenants

Limitations of Common stock dividends

Limitations on additional debts
Not entering into sale and lease back
arrangements

20
Shareholder Wealth Maximizing Is a
Market Concept and Results in
Maximizing PV of E(R)
Measured by Market Value of C/S

21
3 Basic Factors Determine
C/S Market Value
1) Amount of

2) Timing of Expectedcash
flows
3) Risk of

22
Conditions Affecting Market Value

Economic environment factors

Decisions under management control
Conditions in financial markets
Expected cash flows

23
Competitive Forces Influencing
C/S Market Value
New entrants
Substitute products
Bargaining power of buyers
Bargaining power of suppliers
Rivalry among current competitors

24
Cash Flow Concept Used for

Financial analysis
Planning
Resource allocation
CFdoesnotequalaccountingprofit
Internalsources

Cash Externalsources

25
NPV of an Investment

NPV = PV of future cash flows

minus cash outlays
The NPV of an investment
represents the contributions of
that investment to the value of
the firm and passes on to SWM

26
Different Size Businesses

Small Business
Vs.
Large Corporations
Fundamental concepts are the same

27
Small Business

Not the dominant firm in the industry

Tend to grow more rapidly
Limited access to financial market
Lack management resources
Have a high failure rate
Stock is not publicly traded
Poorly diversified
Owner/manager frequently the same

28
Controllers Activities

Financial accounting
Cost accounting
Taxes
Data processing

29
Treasurers Activities

Management of cash and marketable

securities
Capital budgeting
Financial planning
Credit analysis
Investors relations
Pension fund management

30
Disciplines used in Finance

Economics
Accounting
Finance Marketing
Production
Human Resources
Quantitative Analysis

31
Professional Organizations

Financial Executive Institute

Institute of Charted Financial Analysis

Financial Management Association

Institute of Management Accounting

32
Exciting Career Opportunities in
Finance
VP of Finance Financial Analyst
Director Account Executive
Investor Relations Security Broker
Assistant Treasurer Mortgage Analyst
Tax Manager Banking

33