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Chapter 1 introduction to financial management. After studying this chapter you will be able to: Know the basic types of financial management decisions and the role of the financial manager, know the goal of financial management, know the financial implications of the different forms of business organisation, understand the conflicts of interest that can arise between owners and managers.
Introduction to financial management Chapter Key concepts and skills • Have a good understanding of the: – basic types of financial management decisions and the role of the financial manager – goal of financial management – financial implications of the different forms of business organisation – conflicts of interest that can arise between managers and owners Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-2 Chapter outline • Finance: A quick look • Business finance and the financial manager • Forms of business organisation • The goal of financial management • The agency problem and control of the corporation • Financial markets and the corporation Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-3 The four basic areas of finance Corporate finance or business finance Investments Financial institutions International finance Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-4 Investments • Working with financial assets such as shares and bonds • Value of financial assets, risk versus return and asset allocation • Job opportunities – Stockbroker – Financial advisor – Portfolio manager – Security analyst Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-5 Financial institutions • Companies that specialise in financial matters – Banks─commercial and investment, credit unions, savings and loans – Insurance companies Brokerage firms Job opportunities Copyright â 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-6 International finance • This is an area of specialisation within one of the areas discussed so far • Involves international aspects of corporate finance or investments or financial institutions • It may allow you to work in other countries or at least travel on a regular basis • Need to be familiar with exchange rates and political risk • Need to understand the customs of other countries and you would benefit from fluency in a foreign language Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-7 Why study finance? • Marketing – Budgets, marketing research, marketing financial products • Accounting – Dual accounting and finance function, preparation of financial statements • Management – Strategic thinking, job performance and profitability • Personal finance – Budgeting, retirement planning, university planning, day-to-day flow management Copyright © 2011 McGraw-Hill Australia Pty cash Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-8 Business finance • Some important questions that are answered using finance: – What long-term investments should the firm take on? – Where will we get the long-term financing to pay for the investment? – How will we manage the everyday financial activities of the firm? Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-9 Financial manager • Financial managers try to answer some or all of these questions • The top financial manager within a firm is usually the chief financial officer (CFO) – Treasurer: oversees cash management, credit management, capital expenditure and financial planning – Accountant: oversees taxes, cost accounting, financial accounting and data Copyright © 2011 McGraw-Hill Australia Pty Ltd processing PPTs t/a Essentials of Corporate Finance 2e by Ross et al 1-10 Slides prepared by David E Allen and Abhay K Singh A simplified organisational chart Figure 1.1 Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-11 Financial management decisions • Capital budgeting – What long-term investments or projects should the business take on? • Capital structure – How should we pay for our assets? – Should we use debt or equity? • Working capital management – How we manage the day-to-day finances of the firm? Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-12 Forms of business organisations • Three major forms in Australia and New Zealand Sole proprietorship Partnership • General • Limited Corporation Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-13 Sole proprietorship Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-14 Partnership Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-15 Corporation Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-16 International corporate forms • Joint stock companies • Public limited companies • Limited liability companies • All share: – public ownership – limited liability Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-17 Goal of financial management • What should be the goal of a corporation? – Maximise profit? – Minimise costs? – Maximise market share? – Maximise the current value per share of the company’s existing stock? – Maximise the market value of the existing owners’ equity? Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-18 The agency problem • Agency relationship – Principal hires an agent to represent their interests – Shareholders (principals) hire managers (agents) to run the company • Agency problem – Conflict of interest between principal and agent Management goals and agency costs Copyright â 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-19 Do managers act in shareholders’ interests? • Managerial compensation – Incentives can be used to align management and shareholder interests – The incentives need to be structured carefully to make sure that they achieve their goals • Corporate control – The threat of a takeover may result in better management • Other stakeholders Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-20 Example: Work the Web • The Internet provides a wealth of information about individual companies • is an excellent website Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-21 Cash flows between the firm and the financial markets Figure 1.2 Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-22 Financial markets • Cash flows to the firm • Primary vs secondary markets – Dealer vs auction markets – Listed vs private companies Australian Securities Exchange (ASX) Copyright â 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-23 Quick quiz • What are the four basic areas of finance? • What are the three types of financial management decisions and what questions are they designed to answer? • What are the three major forms of business organisation? • What is the goal of financial management? • What are agency problems and why they occur within a corporation? Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al Slides prepared by David E Allen and Abhay K Singh 1-24 Chapter END 1-25 ... understanding of the: – basic types of financial management decisions and the role of the financial manager – goal of financial management – financial implications of the different forms of business... areas of finance Corporate finance or business finance Investments Financial institutions International finance Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance. .. Singh 1-17 Goal of financial management • What should be the goal of a corporation? – Maximise profit? – Minimise costs? – Maximise market share? – Maximise the current value per share of the company’s