cffm6_ch_01_slides_rev_8-25-10

8/3/2019 CFFM6_ch_01_slides_rev_8-25-10

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Introduction to FinancialManagement

Chapter 1

Forms of Business Organization

Stock Prices and Shareholder Value

Intrinsic Values, Stock Prices, and

Executive Compensation Important Business Trends

Conflicts Between Managers,

Stockholders, and Bondholders 1-1


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Finance Within the Organization

Board of Directors

Chief Executive Officer (CEO)

Chief Operating Officer (COO)

Marketing, Production, HumanResources, and Other Operating

Departments

Chief Financial Officer (CFO)

Accounting, Treasury, Credit,Legal, Capital Budgeting, and

Investor Relations

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Forms of Business Organization

Proprietorship

Partnership

Corporation

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Proprietorships and Partnerships

Advantages

Ease of formation

Subject to few regulations

No corporate income taxes

Disadvantages

Difficult to raise capital

Unlimited liability

Limited life

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Corporation

Advantages

Unlimited life

Easy transfer of ownership

Limited liability

Ease of raising capital

Disadvantages

Double taxation

Cost of set-up and report filing

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Stock Prices and Shareholder Value

The primary financial goal of management isshareholder wealth maximization, whichtranslates to maximizing stock price.

Value of any asset is present value of cash flowstream to owners.

Most significant decisions are evaluated in termsof their financial consequences.

Stock prices change over time as conditionschange and as investors obtain new informationabout a companys prospects.

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Financial Goals of the Corporation

If the primary financial goal is shareholderwealth maximization

Do firms have any responsibilities to societyat large?

Is stock price maximization good or bad forsociety?

Should firms behave ethically?


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Stock Prices and Intrinsic Value

In equilibrium, a stocks price should equal itstrue or intrinsic value.

Intrinsic value is a long-run concept.

To the extent that investor perceptions areincorrect, a stocks price in the short run maydeviate from its intrinsic value.

Ideally, managers should avoid actions thatreduce intrinsic value, even if those decisionsincrease the stock price in the short run.

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Determinants of Intrinsic Values andStock Prices

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True InvestorReturns

TrueRisk

PerceivedInvestor Returns

PerceivedRisk

Managerial Actions, the EconomicEnvironment, Taxes, and the Political Climate

Stocks

Intrinsic Value

Stocks

Market Price

Market Equilibrium:Intrinsic Value = Stock Price


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Some Important Business Trends

Recent corporate scandals have reinforcedthe importance of business ethics, and havespurred additional regulations and corporate

oversight. Increased globalization of business.

The effects of ever-improving informationtechnology have had a profound effect on all

aspects of business finance.

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Conflicts Between Managers andStockholders

Managers are naturally inclined to act in theirown best interests (which are not always thesame as the interest of stockholders).

But the following factors affect managerialbehavior:

Managerial compensation packages

Direct intervention by shareholders

The threat of firing

The threat of takeover

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Conflicts Between Stockholders andBondholders

Stockholders are more likely to prefer riskierprojects, because they receive more of theupside if the project succeeds. By contrast,

bondholders receiving fixed payments aremore interested in limiting risk.

Bondholders are particularly concerned aboutthe use of additional debt.

Bondholders attempt to protect themselvesby including covenants in bond agreementsthat limit the use of additional debt andconstrain managers actions.

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Responsibility of the Financial Staff

Maximize stock value by:

Forecasting and planning

Investment and financing decisions

Coordination and control

Transactions in the financial markets

Managing risk

cffm6_ch_01_slides_rev_8-25-10

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