This document discusses the role of financial management. It begins by defining financial management as concerning the acquisition, financing, and management of assets to achieve an overall goal. The goal of the firm is to maximize shareholder wealth by increasing share price. There is a separation between shareholders and managers, with managers acting as agents for shareholders. The document outlines the organization of a typical financial management function within a company.
This document discusses the role of financial management. It begins by defining financial management as concerning the acquisition, financing, and management of assets to achieve an overall goal. The goal of the firm is to maximize shareholder wealth by increasing share price. There is a separation between shareholders and managers, with managers acting as agents for shareholders. The document outlines the organization of a typical financial management function within a company.
This document discusses the role of financial management. It begins by defining financial management as concerning the acquisition, financing, and management of assets to achieve an overall goal. The goal of the firm is to maximize shareholder wealth by increasing share price. There is a separation between shareholders and managers, with managers acting as agents for shareholders. The document outlines the organization of a typical financial management function within a company.
This document discusses the role of financial management. It begins by defining financial management as concerning the acquisition, financing, and management of assets to achieve an overall goal. The goal of the firm is to maximize shareholder wealth by increasing share price. There is a separation between shareholders and managers, with managers acting as agents for shareholders. The document outlines the organization of a typical financial management function within a company.
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Chapter 1
The Role of Financial
Management
1 The Role of Financial Management
What is Financial Management? The Goal of the Firm Organization of the Financial Management Function
2 How is finance related to computer science?
Finance jobs for computer science majors
focus on the analysis of financial data, the development of finance technology (fintech) software and applications to analyze financial markets and automate equities trading, and the creation of algorithms for analysis, fraud detection, and risk management. 3 What is Financial Management?
Concerns the acquisition,
financing, and management of assets with some overall goal in mind. 4 Investment Decisions Most important of the three decisions. What is the optimal firm size? What specific assets should be acquired? What assets (if any) should be reduced or eliminated? 5 Financing Decisions Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet). What is the best type of financing?
What is the best financing mix?
What is the best dividend policy? How will the funds be physically 6 acquired? Asset Management Decisions How do we manage existing assets efficiently? Financial Manager has varying degrees of operating responsibility over assets. Greater emphasis on current asset management than fixed asset management. 7 What is the Goal of the Firm?
Maximization of Shareholder Wealth!
Value creation occurs when
we maximize the share price for current shareholders. 8 Shortcomings of Alternative Perspectives Profit Maximization Maximizing a firm’s earnings after taxes. Problems Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.). Ignores changes in the risk level of the firm. 9 Shortcomings of Alternative Perspectives Earnings per Share Maximization Maximizing earnings after taxes divided by shares outstanding. Problems Does not specify timing or duration of expected returns. Ignores changes in the risk level of the firm. Calls for a zero payout dividend policy. 10 Strengths of Shareholder Wealth Maximization Takes account of: current and future profits and EPS; EPS the timing, duration, and risk of profits and EPS; EPS dividend policy; policy and all other relevant factors. Thus, share price serves as a barometer for business performance. 11 The Modern Corporation
Modern Corporation
Shareholders Management
There exists a SEPARATION
between owners and managers. 12 Role of Management Management acts as an agent for the owners (shareholders) of the firm. An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf. 13 Agency Theory
Jensen and Meckling (1976)
developed a theory of the firm based on agency theory. theory Agency Theory is a branch of economics relating to the behavior of principals and their agents. 14 Agency Theory
Principals must provide incentives
so that management acts in the principals’ best interests and then monitor results. Incentives include stock options, perquisites, and bonuses. bonuses
15 Social Responsibility Wealth maximization does not preclude the firm from being socially responsible. responsible Assume we view the firm as producing both private and social goods. Then shareholder wealth maximization remains the appropriate goal in governing the firm. 16 Organization of the Financial Management Function
Board of Directors
President (Chief Executive Officer)
Vice President VP of Vice President
Operations Finance Marketing
17 Organization of the Financial Management Function
VP of Finance Treasurer Controller Capital Budgeting Cost Accounting Cash Management Cost Management Credit Management Data Processing Dividend Disbursement General Ledger Fin Analysis/Planning Government Reporting Pension Management Internal Control Insurance/Risk Mngmt Preparing Fin Stmts Tax Analysis/Planning Preparing Budgets Preparing Forecasts 18
