© 2003 mcgraw-hill ryerson limited 1 1 chapter prepared by: p chua slides based on: terry fegarty...
TRANSCRIPT
© 2003 McGraw-Hill Ryerson Limited
11Chapt
er
Chapt
er
Prepared By: P Chua
Slides Based on: Terry FegartySeneca College
Book References:1. Block, Short and Hirt
2. Gitman and Hennessey
The Goals and Functions of Financial Management
The Goals and Functions of Financial Management
McGraw-Hill Ryerson ©2003 McGraw-Hill Ryerson Limited
© 2003 McGraw-Hill Ryerson Limited
Chapter 1 - Outline
Definition of Finance Areas of Finance Career Opportunities in Finance Finance as related to Accounting and Economics The Goal of the Financial Manager Agency issue as it relates to owner wealth maximization Stakeholder focus, and ethical behaviour relate to firm’s
goal. Activities of Financial Management Forms of Organization
PPT 1-2
© 2003 McGraw-Hill Ryerson Limited
Finance is the study of financial planning, asset management, and fund raising for businesses and financial institutions.
Financial management can be described using a balance sheet.
What is Finance?
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© 2003 McGraw-Hill Ryerson Limited
Assets: Liabilities & Equity:
Current Assets Current Liabilities
Cash & M.S. Accounts payable
Accounts receivable Notes Payable
Inventory Total Current Liabilities
Total Current Assets Long-Term Liabilities
Fixed Assets: Total Liabilities
Gross f ixed assets Equity:
Less: Accumulated dep. Common Stock
Goodw ill Paid-in-capital
Other long-term assets Retained Earnings
Total Fixed Assets Total Equity
Total Assets Total Liabilities & Equity
WorkingCapital
WorkingCapital
InvestmentDecisions
FinancingDecisions
Macro Finance
© 2003 McGraw-Hill Ryerson Limited
Areas of Finance
1. Financial Markets
- Markets of users and savers of funds.
- Money markets deal in short-term securities (<=1 year)
Ex.; Treasury Bills, commercial paper
- Capital markets deal in long-term securities
Ex.; common stock, preferred stock, corporate bonds, government bonds
2. Financial Services
- Design and delivery of financial advice and products to individuals, businesses, government.
3. Managerial Finance
- Financial management of business firms.
- Financial management involves the efficient use of financial resources in the production of goods
A well-developed financial system is a hallmark and essential characteristic of any modern developed nation.
© 2003 McGraw-Hill Ryerson Limited
Career Opportunities in Finance
Financial Analyst – prepares and analyze firm’s financial plans and budgets; other duties include financial forecasting, financial ratio analysis.
Capital budgeting analyst/manager – evaluation/recommendation of proposed asset investments, implementation of approved projects.
Project finance manager –arranges financing for approved asset investments; coordinates with investment bankers and legal counsel.
Cash manager - maintain and control firm’s daily cash balances; manages cash collection, short-term investment/borrowing, disbursement activities and banking relationships.
Credit analyst/manager – administers firm’s credit policy by analyzing/managing the evaluation of credit applications, extending credit, monitoring/collecting A/R’s.
© 2003 McGraw-Hill Ryerson Limited
Finance as related to Accounting and Economics
Finance is related to:
Accounting, which provides information in financial statements
Economics, which provides: analysis tools such as pricing theory through supply
and demand analysis, cost-benefit analysis etc. information on the economic and financial
environment in which the company operates for sound financial decisions. These include inflation rate, exchange rate, international capital flows, unemployment rate, etc.
All of these factors must fit into the financial decisions
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© 2003 McGraw-Hill Ryerson Limited
Difference Between Finance and Accounting Recognition of Revenue and Expenses
Accrual Basis: recognizes sales revenue and expenses incurred to make sale at time of sale.
Cash Basis: recognizes revenues and expenses as they occur.
Accounting vs Financial View
Accounting View(Accrual Basis)
Income StatementPeakes Quay, Inc.
For year ended 12/31
Financial View(Cash Basis)
Cash Flow StatementPeakes Quay, Inc.
For year ended 12/31
Sales revenue $100,000Less: Costs 80,000Net Profit $ 20,000
Cash inflow $ 0Less: Cash outflow 80,000Net cash flow ($80,000)
© 2003 McGraw-Hill Ryerson Limited
Goal of the Financial Manager
Should it be Profit Maximization? Corporations commonly define profit as “Earnings per
Share” (EPS). EPS ignores at least 2 critical factors:
the timing of the returns. risk factors facing the firm.
Profitability Risk
Profitability Risk ex., investing in stocks vs. savings accounts Stocks may be more profitable but are riskier Savings accounts are less profitable and less risky (or safer)
© 2003 McGraw-Hill Ryerson Limited
Goal of the Financial Manager
Or should it be Shareholder Wealth Maximization?
Shareholder Wealth Maximization considers factors of EPS timing, and risk ignored by the EPS.
Therefore, Maximizing Shareholder Wealth is a more comprehensive goal for the firm, its managers and employees.
© 2003 McGraw-Hill Ryerson Limited
Goal of the Financial Manager
Also, shareholder wealth maximization is in general, consistent with the social responsibility of the firm. Adopting policies that will improve the share price can attract capital and provide employment.
But could conflict with social / ethical goals (for example, pollution control) interests of management (for example, short-term
compensation)
Management can encourage an increase in share price by earning an attractive return at an acceptable level of risk
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© 2003 McGraw-Hill Ryerson Limited
Agency Theory: The Principal-Agent Problem Agency Theory is about the conflict that may arise between
management and owners whenever owners are not also the managers.
Management may not always act in the best interest of the owners because management has interest of its own, like personal wealth, job security, lifestyle, and benefits. Thus, these concerns may conflict with shareholder interests.
The pursuit of socially or ethically acceptable goals may have to come at the expense of shareholder’s wealth.
© 2003 McGraw-Hill Ryerson Limited
Importance of Ethics to Stakeholders Stakeholders are those groups that have direct economic links to the
firm.
Stakeholders include not only owners, but also employees, customers, suppliers, unions, and creditors.
Honesty, trustworthiness, fair dealing are foundations of sustainable business relations with these stakeholders.
Ethical behaviour is necessary to achieve the goal of maximizing shareholder wealth.
Maintaining positive stakeholder relationships helps maximize long-term benefits to shareholders.
© 2003 McGraw-Hill Ryerson Limited
Financial Manager–Key Activities
Activities include: Short-Term Financial Decisions
Working Capital Management
- ex., careful monitoring of cash position on a day-to-day basis Financial Analysis and Planning
Investment Decisions (Capital Budgeting) long-term (L/T) financial decisions (>1 year)
- ex., purchasing a new machine in the future
Financing decisions (capital structure) how to raise money: loans? leases? shares? bonds?
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© 2003 McGraw-Hill Ryerson Limited
A business owned byA business owned byone personone person
FreedomFreedom
SimplicitySimplicity
Low Start UpLow Start UpCostsCosts
Tax BenefitsTax Benefits
Unlimited Unlimited LiabilityLiability
Lack of ContinuityLack of Continuity
Difficulty in Difficulty in Raising MoneyRaising Money
Reliance on One Reliance on One PersonPerson
AdvantagesAdvantagesDisadvantagesDisadvantages
Forms of Organization: Sole Proprietorships
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© 2003 McGraw-Hill Ryerson Limited
Greater Talent PoolGreater Talent Pool
More CapitalMore Capital
Ease of FormationEase of Formation
Tax BenefitsTax Benefits
Unlimited LiabilityUnlimited Liability
Lack of ContinuityLack of Continuity
OwnershipOwnershipTransferTransferDifficultDifficult
Possibility of Possibility of ConflictConflict
A business venture with two or more ownersA business venture with two or more owners
AdvantagesAdvantages DisadvantagesDisadvantages
Forms of Organization: Partnerships
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Limited LiabilityLimited Liability
ContinuityContinuity
Greater LikelihoodGreater Likelihood of Professionalof Professional ManagementManagement
Easier Access to Easier Access to MoneyMoney
Potential Shareholder Potential Shareholder RevoltsRevolts
Higher Start-UpHigher Start-Up CostsCosts
RegulationRegulation
Double Double TaxationTaxationA corporation A corporation
is a separate legal entityis a separate legal entity
AdvantagesAdvantages DisadvantagesDisadvantages
Forms of Organization: Corporations
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© 2003 McGraw-Hill Ryerson Limited
Summary and Conclusions
The financial manager: controls the daily cash inflows and outflows resulting from business operationsmakes the occasional investment and financing decisions essential for the future financial success of the businessmay work in a corporation or other form of business organization
Their overriding goal is to maximize the wealth of the owners by earning an attractive return in the business at an acceptable level of risk
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