Introduction to Financial Management and Analysis

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

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An Overview of Financial and
Multinational Financial
Management

Corporate Finance

Dr. A. DeMaskey

Learning Objectives


Questions to be answered:


What is the role of financial management?


What are the three main areas of finance?


How are companies organized?


What are the goals of the corporation?


What key trends are affecting financial
management today?


What factors make multinational financial
management different?


What agency relationships exist within
corporations?


What three questions does financial
management seek to answer?


What causes a company to have a
particular stock value?


How can managers make choices that
add value to their companies?


How can managers ensure that their
companies don’t run out of cash while
executing their plans?


The Field of Finance


Capital Markets/Financial Institutions


Investments


Financial Management

Financial Decisions Within the
Firm


Investment Decisions


Financial Decisions


Both

Financial Management and
Analysis


Financial Management


Financial Analysis

Alternative Forms of

Business Organization


Sole proprietorship


Partnership


Corporation

Sole Proprietorship


Advantages:


Ease of formation


Subject to few regulations


No corporate income taxes


Disadvantages:


Limited life


Unlimited liability


Difficult to raise capital

Partnership


A partnership has roughly the same
advantages and disadvantages as a sole
proprietorship.

Corporation


Advantages:


Unlimited life


Easy transfer of ownership


Limited liability


Ease of raising capital


Disadvantages:


Double taxation


Cost of set
-
up and report filing

Goals of the Corporation


The primary goal is
shareholder wealth
maximization
, which translates to
maximizing stock price.


Should firms behave ethically?
YES!


Do firms have any responsibilities to
society at large?
YES!
Shareholders are
also members of society.

Goals of the Corporation


Maximizing the owners’ wealth


Maximizing shareholders’ wealth


Maximizing the price per share


Maximizing economic profits

Economic Profit Versus
Accounting Profit


Economic profit


Opportunity cost


Normal profit


Accounting profit


Ignores opportunity costs and normal
profits


Does not reflect the firm’s actual cash
flows

Is maximizing stock price good for
society, employees, and customers?


Employment growth is higher in firms
that try to maximize stock price. On
average, employment goes up in:


firms that make managers into owners
(such as LBO firms)


firms that were owned by the government
but that have been sold to private
investors

Is maximizing stock price good for
society, employees, and customers?


Consumer welfare is higher in capitalist
free market economies than in
communist or socialist economies.


Fortune

lists the most admired firms.
In addition to high stock returns, these
firms have:


high quality from customers’ view


employees who like working there

Factors That Affect the Firm’s
Stock Price



Internal Factors


Amount

of cash
flows expected by
shareholders


Timing

of the cash
flow stream


Risk

of the cash
flows


Use of debt


Dividend policy


External Factors


Legal constraints


General level of
economic activity


Tax laws


Conditions in the
stock market


Investor
expectations

Three Determinants of Cash
Flows


Sales


Current level


Short
-
term growth rate in sales


Long
-
term sustainable growth rate in sales


Operating expenses


Capital expenses

Factors that Affect the Level and

Risk of Cash Flows


Decisions made by financial managers:


Investment decisions (product lines,
production processes, geographic market,
use of technology, marketing strategy)


Financing decisions (choice of debt policy
and dividend policy)


The external environment

Financial Management

Issues of the New Millennium


Use of
computers

and
electronic
transfers

of information



The
globalization

of business



Corporate governance

Agency Relationships


An
agency relationship

exists whenever
a principal hires an agent to act on his
or her behalf.


Within a corporation, agency
relationships exist between:


Shareholders and managers


Shareholders and creditors

Shareholders versus Managers


Managers are naturally inclined to act in
their own best interests.


But the following factors affect
managerial behavior:


Managerial compensation plans


Direct intervention by shareholders


The threat of firing


The threat of takeover

Shareholders versus Creditors


Shareholders (through managers) could
take actions to maximize stock price
that are detrimental to creditors.


In the long run, such actions will raise
the cost of debt and ultimately lower
stock price.

What is a multinational
corporation?


A
multinational corporation
is one that
operates in two or more countries.


At one time, most multinationals
produced and sold in just a few
countries.


Today, many multinationals have world
-
wide production and sales.

Why do firms expand into

other countries?


To seek
new markets


To seek new supplies of
raw materials


To gain
new technologies


To gain
production efficiencies


To avoid
political and regulatory obstacles


To reduce risk by
diversification

What are the major factors that
distinguish multinational from
domestic financial management?


Exchange rate risk


Currency

differences


Economic

risk


Political

risk


Government
roles


Cultural, legal, and institutional differences


Cultural
differences


Language

differences


Legal

differences