An Overview of Managerial Finance

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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

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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

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Finance in the Organizational
Structure of the Firm •Manage cash & Marketable Securities
•Plan how the firm is financed
•Manage Risk
•Oversee pension fund
Board of Directors

President (CEO)

Vice-President: Vice-President: Vice-President: Vice-President:

Sales Operations (COO) Finance (CFO) Information Systems (CIO)

Director of Financial
Credit Inventory Tax
Capital Treasurer Controller and Cost
Manager Manager Department
Budgeting Accounting

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Alternative Forms of
Business Organization

Proprietorship

Partnership

Corporation

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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

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Partnership

Like a proprietorship, except two or

more owners
A partnership has roughly the same
advantages and limitations as a
proprietorship

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Corporation

Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
Disadvantages:
Cost of set-up and report filing
Double taxation

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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

maximization—translates 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
Market Factors/Considerations
Economic Conditions
Government Regulations and Rules
Competitive Environment

Firm Factors/Considerations Investor Factors/Considerations

Normal Operations (Revenues and Expenses) Income/Savings
Financing Policy (Capital Structure) Age/Lifestyle
Investing Policy (Capital Budgeting) Interest Rates
Dividend Policy Risk Attitude

Net Cash Flows, CF Rates of Return, r

^ ^ N ^^
CF 1 CF 2 CFN CFt
 1
 2
 ... N
  t
(1 r) (1 r) (1 r) (1 r)
t 1 14
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
shareholder’s 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 company’s attitude

and conduct toward its employees,
customers, community, and
stockholders

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Multinational Corporations
Five reasons firms go “international”
1. To seek new markets
2. To seek raw materials
3. To seek new technology
4. To seek production efficiency
5. 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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