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Environment of
Managerial Finance
Finance
Board of Directors
President
VP: Sales
VP: Finance
Treasurer
VP: Operations
Controller
Credit Manager
Cost Accounting
Inventory Manager
Financial Accounting
Tax Department
Maximize
1.
2.
3.
4.
5.
Modern
managerial finance
theory
operates
on
the
assumption that the primary
goal of the firm is to maximize
the
wealth
of
its
stockholders,
which
translates into maximizing
the price of the firms
common stock.
6
Profit
maximization is basically a
single-period or short-term goal
which is usually interpreted to
mean the maximization of profits
within given a given period of time.
A firm may maximize its profits at
the expense of its long-term
profitability & still realize this goal.
7
Advantages
Easy
to calculate.
Easy to determine the
link between financial
decisions & profits.
Disadvantages
Emphasizes
the short
term.
Ignores risk or
uncertainty.
Ignores the timing of
returns.
Require immediate
resources.
9
Advantages
Emphasizes
the long
Disadvantages
Offers
no clear
term.
relationship between
financial decisions &
Recognizes risk.
stock price.
Recognizes the timing
Can lead to
of returns.
management anxiety &
Consider stockholders
frustration.
return.
10
Modern Corporation
Shareholders
Management
Jensen
Principals
12
An
Within
a corporation, agency
relationships exist between:
Shareholders and managers
Shareholders and creditors
13
14
15
1.
Market Forces
Major Shareholders.
Threat of Takeover.
2.
16
1.
2.
3.
Financial Instruments.
Financial Institutions.
Financial Markets.
17
18
Characteristics
Standardization
Communicate Information
19
1.
Size the promised payment.
(Face
Value)
2.
When the payment will be
received. (Maturity)
3.
The likelihood the payment will
be made
(risk).
4.
The conditions under which the
payment will be made. (Prerogatives)
20
Primarily Stores of
Value
1.
2.
3.
4.
5.
Bank Loans
Bonds
Home Mortgages
Stocks
Asset-backed
securities
Primarily to
transfer risk
1.
2.
3.
Insurance
Futures Contracts
Options
21
22
23
24
Characteristics of a well-run
financial market