Chapter 1

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Nov 9, 2013 (3 years and 1 month ago)

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Chapter 1

Contemporary Financial
Management

Revolution of the Finance Function


1900
-
1920: Focus on legal issues surrounding
capital markets



1920’s: Corporate expansion, new technologies
(
e.g

TV), and new financial instruments (
e.g

mutual funds)



Post
-
1945: Current focus on financial implications
of business decisions (i.e. investment, value
maximization)

Revolution of the Finance Function


Big changes in the 1980s


2000s


Disinflation


Revolution in telecommunications


Better macroeconomic management


Large
-
scale asset securitization: cash flows of
assets are repackaged and sold to investors
through the capital markets


Growth of so
-
called BRIC countries

Revolution of the Finance Function



Major
trends

that continue to affect corporate
financial management:

1.

Globalization of business and financial
management

2.

Fallout from the accounting and financial scandals
of the past several years (e.g. Enron, Worldcom).
Recent bankruptcies (e.g. Lehman Brothers) are
the result of excessive leverage and poor financial
management.


Revolution of the Finance Function


Critical components of success


Need new framework built on sound financial
principles and transparency to gain public trust


Well
-
informed business decisions based on
knowledge of financial management principles
and techniques


While there are no rules and regulations that
guarantee success…



Goals of Financial Management



Maximize the value of firm’s outstanding common
stock


Maximize earnings per share (not only total
profits)


Timing of increased earnings is important! Must
consider the present value of future earnings


Balance between business and financial risk

Goals of Financial Management


Business risk
: Risk imposed by business
environment and economic cycle in which firm
operates


Ex. Expected future demand for electricity is less
difficult to predict than expected future demand
for most high
-
technology products


Financial risk
: Risk imposed by manner in
which firm is financed


Ex. The more debt employed, the greater risk of
insolvency

Goals of Financial Management


Overall objective
:


Maximization of earnings per share of common
stock subject to consideration of business and
financial risk, time of earnings, and impact of
dividend policy.

Organization and Structure of the Book

1.
Introduction

2.
Fundamentals of financial accounting

3.
Financial analysis

4.
Working capital management

5.
Long
-
term investment decisions

6.
Long
-
term financing decisions

7.
Special topics


Corporate governance and risk management


International finance


Mergers and acquisitions