chapter 1 -- the role of financial management · pdf filevan horne / wachowicz tenth edition...

Type of Business andType of Business and

The Role of Financial The Role of Financial ManagementManagement

Type of Business andType of Business and

The Role of Financial The Role of Financial ManagementManagement

Organizing a BusinessOrganizing a Business

Types of Business Organizations

Sole Proprietorships

Partnerships

Corporations

Sole

Proprietorship

Partnership Corporation

Who owns the

business?

The manager

Partners Shareholders

Are managers

and owners

separate?

No No Usually

What is the

owner’s

liability?

Unlimited Unlimited Limited

Are the owner

& business

taxed

separately?

No No Yes

Organizing a BusinessOrganizing a Business

Corporate StructureCorporate Structure

Sole Proprietorships

Corporations

Partnerships

Limited Liability

Corporate tax on profits

+

Personal tax on

dividends

Unlimited Liability

Personal tax on profits

What is the Goal of What is the Goal of the Firm?the Firm?

Maximization of Maximization of Shareholder Wealth!Shareholder Wealth!

Value creation occurs when we maximize the share price for current shareholders.

Financial

Manager

Firm's

operations Investors

(1) Cash raised from investors

(1)

(2) Cash invested in firm

(2)

(3) Cash generated by operations

(3)

(4a) Cash reinvested

(4a)

(4b) Cash returned to investors

(4b)

The Role of The Financial Manager

Real

assets

Investment Decisions

What is the optimal firm size?

What specific assets should be acquired?

What assets (if any) should be reduced or eliminated?

Most important of the three Most important of the three

decisionsdecisions..

Financing DecisionsFinancing Decisions

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 acquired?

Determine how the assets (LHS of Determine how the assets (LHS of

balance sheet) will be financed (RHS balance sheet) will be financed (RHS

of balance sheet).of balance sheet).

Asset Management DecisionsAsset 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.

Goals of The CorporationGoals of The Corporation

Shareholders desire wealth maximization

Do managers maximize shareholder wealth?

Mangers have many constituencies “stakeholders”

“Agency Problems” represent the conflict of interest between management and owners

Role of ManagementRole of Management

An An agentagent is an individual authorized is an individual authorized by another person, called the by another person, called the principal, to act in the latter’s principal, to act in the latter’s behalf.behalf.

Management acts as an agentagent

for the owners (shareholders)

of the firm.

Agency TheoryAgency Theory

Agency TheoryAgency Theory is a branch of economics relating to the behavior of principals and their agents.

Jensen and Meckling developed

a theory of the firm based on

agency theoryagency theory.

Agency TheoryAgency Theory

Principals must provide incentivesincentives

so that management acts in the

principals’ best interests and then

monitormonitor results.

Irwin/McGraw-Hill

Financial MarketsFinancial Markets

Company

Issue Debt

CashInvestors

Irwin/McGraw-Hill

Financial MarketsFinancial Markets

Funds

Funds

Banks

Insurance Cos.

Brokerage Firms

Obligation

s

Depositors

Policyholders

Investors

Obligation

s

Company

Intermediary

Investor

Irwin/McGraw-Hill

Financial MarketsFinancial Markets

Banks

Depositors

$2.5 mil

Cash

Loan

Deposits

Company

Intermediary

Investor

Financial Public RelationsFinancial Public Relations

and Investor Relationsand Investor Relations

WHAT IS PR ?

PR Involves a Variety of Programmes

Designed to Promote or Protect a

Company,s Image or its Products

Evaluate public Attitudes

Identifies issues of Identifies issues of public concern

programs to gain public acceptance

Executes programs to gain public acceptance

The Role of The Role of

Public RelationsPublic Relations

Functions of Public Functions of Public RelationsRelations

Press Relations Press Relations

Product PublicityProduct PublicityProduct PublicityProduct Publicity

Corporate CommunicationCorporate CommunicationCorporate CommunicationCorporate Communication

Public AffairsPublic AffairsPublic AffairsPublic Affairs

LobbyingLobbyingLobbyingLobbying

Employee and Investor RelationsEmployee and Investor RelationsEmployee and Investor RelationsEmployee and Investor Relations

Crisis ManagementCrisis ManagementCrisis ManagementCrisis Management

Investor RelationsInvestor RelationsInvestor relations is defined as “a strategic

management responsibility that integrates finance,

communication, marketing and securities law

compliance to enable the most effective two way

communication between a company, the financial

community, and other constituencies, which

ultimately contributes to a company’s securities

achieving fair valuation”.

1. Investor relations is responsible for raising shareholder capital to enable corporations to implement their visioninto reality.

2. Investor relations helps companies survive through variousstages of their development by enabling access to shareholder capital.

3. Investor relations ensures corporate executives are doing everything they can to lead corporations to long-term sustainable growth, while simultaneously benefiting the society and providing financial returns to shareholders.

Benefits of Benefits of Investor RelationsInvestor Relations