An Overview of Managerial Finance

What is Finance?
Finance is concerned with decisions about money (Cash Flows) Finance decisions deal with how money is raised and used Everything else being equal:
More value is preferred to less The sooner cash is received the more value it has Less risky assets are more valuable than riskier assets

General Areas of Finance

Financial Markets and Institutions
Banks, Insurance Companies, Saving & Loans, Credit Unions etc.

Investments
Stock Brokerage firms, Financial Institutions, Investment Companies, Insurance Companies etc.

Financial Services
Financial Consultants, Auditing Firms etc

Managerial Finance
All type of Firms making Financial Decisions concerning cash flows

Finance in the Organizational Structure of the Firm

Board of Directors President (CEO)

Manage cash & Marketable Securities Plan how the firm is financed Manage Risk Oversee pension fund

Vice-President: Sales

Vice-President: Operations (COO)

Vice-President: Finance (CFO)

Vice-President: Information Systems (CIO)

Credit Manager

Inventory Manager

Director of Capital Budgeting

Treasurer

Controller

Financial Tax and Cost Department Accounting

Alternative Forms of Business Organization

Proprietorship

Partnership Corporation

Proprietorship
Advantages:
Ease of formation Subject to few government regulations No corporate income taxes

Limitations:
Unlimited personal liability Limited life

Transferring ownership is difficult Difficult to raise capital

Partnership
Like a proprietorship, except two or more owners A partnership has roughly the same advantages and limitations as a proprietorship

Corporation
Advantages:
Unlimited life Easy transfer of ownership Limited liability

Ease of raising capital

Disadvantages:
Cost of set-up and report filing

Double taxation

Business Organized as a Corporation: Value Maximized

Limited liability reduces risk increasing market value Ease of raising capital allows taking advantage of growth opportunities Ownership can be easily transferred thus investors would be willing to pay more for a corporation

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Goals of the Corporation

Primary goal:stockholder wealth maximizationtranslates to maximizing stock price. Managerial incentives
Provide valuable incentives to keep the interest of management alive and inline with stockholder wealth maximization.

Social responsibility
The concept that businesses should be actively concerned with the welfare of society at large.

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Managerial Actions to Maximize Stockholder Wealth

Capital Structure Decisions
Decision about how much and what types of debt and equity should be used to finance the firm.

Capital Budgeting Decisions

Decision as to what types of assets should be purchased to help generate future cash flows.

Dividend Policy Decisions

Decisions as to how much of current earnings to pay out as dividends rather than to retain for reinvestment in the firm.

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Value of the Firm

The present or current value of cash flows an asset is expected to generate in the future

Market Factors/Considerations Economic Conditions Government Regulations and Rules Competitive Environment Firm Factors/Considerations Normal Operations (Revenues and Expenses) Financing Policy (Capital Structure) Investing Policy (Capital Budgeting) Dividend Policy Net Cash Flows, CF Investor Factors/Considerations Income/Savings Age/Lifestyle Interest Rates Risk Attitude Rates of Return, r

CF 1 CF 2 CFN CFt ... 1 2 N t (1 r) (1 r) (1 r) (1 r) t 1

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Factors Influenced by Managers that Affect Stock Price

Projected earnings per share Timing of earnings streams Risk of projected earnings Use of debt (capital structure) Dividend policy

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Agency Relationships
An agency relationship exists whenever a principal hires an agent to act on his or her behalf.

An agency problem results when the agent makes decisions that are not in the best interest of principals

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Stockholders versus Managers

Managers are naturally inclined to act in their own best interests. Mechanisms to motivate managers to act in shareholders best interest
Managerial compensation (incentives)
Performance shares awarded on basis of EPS, executive stock purchased at future time at given price, restricted stock grants to employees for some time in future.

The threat of firing

Possible now due to ownership by few large institutions like pension fund, mutual funds etc like cocacola, UA.

Shareholder intervention
Big Funds now closely monitor firms and influence management decisions when ever needed.

Threat of takeover
Hostile takeovers, management is fired.

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Business Ethics
Webster: A standard of conduct and moral behavior.

Business Ethics: A companys attitude and conduct toward its employees, customers, community, and stockholders

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Multinational Corporations
Five reasons firms go international
1. 2. 3. 4. 5.

To seek new markets To seek raw materials To seek new technology To seek production efficiency To avoid political and regulatory hurdles

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Factors Distinguishing Domestic Firms from Multinational Firms

Different currency denominations Economic and legal ramifications Language differences Cultural differences Role of governments

Political risk

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Thank you

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