Colorado University of Commerce

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9 Νοε 2013 (πριν από 3 χρόνια και 9 μήνες)

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Slide
1

Colorado University of Commerce


Bachelor of Business

(Event management /
Hospitality & Tourism)


Financial Management


Chapter 1
-

Introduction

Slide
2

Introduction to Financial Management


Definitions of Finance


Financial Management Decisions and The Goal


Forms of Business Organizations


The Corporation and Financial Markets


Ten Principles of Finance

Slide
3

Definition of Finance


Finance is the study of how people allocate scarce
resources over time. Two characteristics of
financial decisions;


Costs and benefits of financial decisions are spread out
over time


Costs and benefits are not known in advance


Finance consists of concepts to help you organize
your decision making process and quantitative
models to help you evaluate alternatives

Slide
4

Financial Management Decisions and The Goal


Capital Budgeting: What assets should be
acquired?


Capital Structure: What is the best way of
financing the assets?


Working Capital Management: Short
-
term asset
and liability management

Slide
5

Financial Management Decisions and The Goal
(Continued)


The Goal of Financial Managers


Maximize profits


How to define profits


Risks associated with maximizing profits are ignored


Profits of this year or the next should be maximized?


Maximize the market value of the existing owners’
equity

Slide
6

Forms of Business Organization


Ownership
Form

Ease of
Formation

Ability to Raise
Funds

Management

Personal
Liability

Income Tax
Treatment

Transfer of
Ownership

Dissolution

Individual
(Sole
Proprietorship)

Simple and
inexpensive

Limited

Flexible,
independent, may
lack expertise

Unlimite
d

Single

Simple and
inexpensive

Excellent

General
Partnership

Moderately easy

Limited but
superior to
individual
ownership

Designated
partners

Unlimited

Single

Poor

Fairly simple

Limited
Partnership

Moderately
difficult and
expensive

Limited but
superior
to
general
partnership

General partners or
agents

Limited for
limited
partners

Single

Poor for
general
partners

Time
consuming

Corporation

Complex and
expensive

Good

Usually separate
from ownership

Limited

Double

Superior

Simple but
needs
shareholders’
a
pproval

Slide
7

The Corporation and Financial Markets



Corporation

Cash Flows:
Reinvested or



Investors



Secondary
Market



Government

Tax

Cash

Securities

Dividends, Interest etc.

Slide
8

The Corporation and Financial Markets (Continued)


Primary Market


Market in which new issues of a security are sold to
initial buyers


Secondary Market


Market in which previously issued securities are traded


Initial Public Offering (IPO)


The first time the firm’s stock is sold to the general
public

Slide
9

Ten Principles of Financial Management


Risk
-
Return Tradeoff


Save and invest for future consumption


Investments should provide appropriate compensation
for forgone consumption

Slide
10

Ten Principles of Financial Management (Continued)

90%

Large
-
company

stocks

13.3%

20.1

Small
-
company

stocks

17.6

33.6

Long
-
term

corporate bonds

5.9

8.7

Long
-
term

government

5.5

9.3

Intermediate
-
term

government

5.4

5.8

U.S. Treasury

bills

3.8

3.2


Inflation

3.2

4.5

-
90%

0%

Series

Average

Return

Standard

Deviation

Distribution

Slide
11

Ten Principles of Financial Management (Continued)


The Time Value of Money


A dollar received today is more valuable than a dollar
received in the future because of opportunity cost


Costs and future benefits of investments should be
measured in present values


If present value of future benefits exceed costs, then
investment should be made (Net Present Value
(NPV)>0)

Slide
12

Ten Principles of Financial Management (Continued)


Cash is King


Cash flows not accounting profits are important


Cash flows received can be reinvested by the firm


Accounting problems
-
depreciation and matching of
costs and expenses


Incremental Cash Flows that Matter


Incremental cash flows are direct consequence of
taking a specific course of action

Slide
13

Ten Principles of Financial Management (Continued)


Competitive Markets


Project evaluation vs. value creation
-
investing for
returns above same risk alternatives


It is not easy to find projects that create wealth
-
competition


Perfect market conditions: No entry and exit
restrictions, No one producer or buyer large enough to
affect prices, Identical products are manufactured,
Production costs are identical, Everyone is informed
about everything

Slide
14

Ten Principles of Financial Management (Continued)


If markets are perfect then it is not possible to
create wealth


How can we make markets less competitive?


Product Differentiation based on features, quality,
image, service and distribution


Cost Advantage through economies of scale,
technology, corporate culture and input supply control

Slide
15

Ten Principles of Financial Management (Continued)


Efficient Markets


Price adjustments to new information is quick and
correct


Many profit driven investors


Information arrival is random


Slide
16

Ten Principles of Financial Management (Continued)



Calwest Industrial Properties, a closely held real
-
estate
concern, has agreed to acquire Cabot Industrial Trust
(CTR) for about $1.06 billion plus the assumption of
$925 million in preferred stock and debt, people familiar
with the matter say. Under terms of the deal, Calwest
would pay $24 a share for Boston
-
based Cabot. The price
represents a 20% premium to Cabot's price in 4 p.m.
trading Friday on the New York Stock Exchange, when
its shares were changing hands at $19.95, down five cents
for the day.” WSJ, October 29, 2001

Slide
17

Ten Principles of Financial Management (Continued)

Slide
18

Ten Principles of Financial Management (Continued)


Agency Problem


Separation of ownership and management


Principal
-
Shareholders


Agents
-
Managers


Will managers work in the shareholders’ best interest?


Preference toward size over profitability


Excessive perquisites


Attitudes toward risk


Slide
19

Ten Principles of Financial Management (Continued)


Types of agency costs


Costs of trying to get the agents to do what the
principal want
-
monitoring costs


Lost opportunities caused by conflicts too expensive to
resolve


Possible solutions


Managerial compensation


Control of the firm


Slide
20

Ten Principles of Financial Management (Continued)


Taxes Bias Business Decisions


After
-
tax cash flows received can be reinvested


Favorable tax status for certain investments affects
decisions


Financial leverage is affected by tax status
-
interest
payments are tax
-
deductible expenses


Slide
21

Ten Principles of Financial Management (Continued)


Diversification Eliminates Certain Type of Risk


Diversifiable/Firm Specific/Unsystematic Risk


Non
-
diversifiable/Market/Systematic Risk


Firm specific good news and bad news wash each
other out


Slide
22

Ten Principles of Financial Management (Continued)

Slide
23

Ten Principles of Financial Management (Continued)


Ethical Behavior is Doing the Right Thing


Doing something that is viewed right by many people


An action that is not prohibited by law can be unethical


Unethical behavior might be costly