Docstoc

Overview of Corporate Financial Management

Document Sample
Overview of Corporate Financial Management Powered By Docstoc
					  Introduction
 and Overview                  1


      Corporate Financial Management 2e
            Emery Finnerty Stowe
                                          1

1-1
      Chapter Outline

      1.1   What Is Finance?
      1.2   Ownership, Control, and Risk
      1.3   Three Different Views of the Firm
      1.4   The Role of the Corporation
      1.5   The Evolution of Finance




                                                2

1-2
      What is Finance?

        Finance is concerned with:

       Determining value.

       Value = What something is worth now.

       Making the best decision when that decision
        involves money. 

                                                      3

1-3
      The Science of Finance

      Finance is a science.
      Like other sciences, it has fundamental
       concepts, principles, and theories.
      In Chapter 2, we describe the Principles of
       Finance.




                                                     4

1-4
      The Art of Finance
       In some situations, precise models cannot be
        created.
       That does not mean that we cannot make
        decisions in these situations.
       People may refer to using intuition to make
        decisions.
       Decision makers are often using intuition from
        the Principles of Finance.
       They are using scientific valuation concepts, but
        not exact numbers.
                                                            5

1-5
      Three Types of Decisions

        Investment Decisions
           What assets should the firm invest in?
        Financing Decision
           How should the purchase of assets be financed?
        Managerial Decisions
           How large should the firm be?
           How fast should it grow?
           Should the firm grant credit to a customer?
           How should the managers be compensated?
                                                             6

1-6
      Financial Markets and Intermediaries

      The study of markets where financial
       securities (such as stocks and bonds) are
       bought and sold.
      The study of financial institutions (such as
       commercial banks, investment banking
       firms, and insurance companies) that help
       the flow of money from savers to
       demanders of money.
                                                      7

1-7
      The Corporate Form of Organization

       Ownership
         The shareholders (also known as stockholders or
          equityholders) are the owners of the corporation.
       Control
         Ultimate control rests with the shareholders, but the
           managers control the day-to-day operations.
       Risk Bearing
         While all parties associated with the corporation bear
           the risk, shareholders bear all residual risk.
                                                                   8

1-8
        Advantages of Corporate Form of
        Organization

      Limited Liability
      Permanency
      Transferability of Ownership
      Better Access to Capital Markets



                                          9

1-9
   Rights of Ownership

   Dividend Rights
   Voting Rights
    Majority voting
         one vote per share per director
         cannot combine votes
       Cumulative voting
         directors are voted on jointly
         can cast all votes for a single candidate

                                                      10

1-10
   Rights of Ownership (continued)

       Liquidation Rights
          Owners have the right to a proportional
           share of the firm’s residual value in the event
           of liquidation, after other senior claims are
           paid.
       Preemptive Rights
         Owners have the right to subscribe
           proportionally to any new shares issued by
           the firm.
                                                             11

1-11
   The Goal of the Firm

          “Maximize Shareholder Wealth”

   Between defined than profits
   Considers timing of profits
   Considers risk differences among
    alternative courses of action



                                          12

1-12
   Henry Ford’s Fictionalized Firm

   Cash                 $C
   Raw Material         $R
   Tools                $T
   Garage               $G        Henry’s Equity                $HE
     Total Assets      $TA          Liabilities & Owner’s Equity $TA

    Organized as a sole proprietorship.
      Henry Ford is the sole owner of the firm.
      He has full control over the firm.
      He bears all of the risk.
                                                                   13

1-13
   Henry Ford’s Fictionalized Firm

   Cash                     $C’
   Raw Material             $R’
   Tools                    $T’       Bank Loan                     $B’
   Garage                   $G’       Henry’s Equity               $HE’
     Total Assets          $TA’        Liabilities & Owner’s Equity $TA’


        Henry’s firm after the bank loan.
          Henry Ford is the sole owner of the firm.
          He has full control over the firm.
          Some risk is borne by the bank.
          He bears all of the remaining (residual) risk.
                                                                      14

1-14
   Henry Ford’s Fictionalized Firm

   Cash                  $C”
   Raw Material          $R”        Bank Loan                     $B”
   Tools                 $T”        New Shareholder’s Equity     $O”
   Garage              $G”          Henry’s Equity               $HE
     Total Assets       $TA          Liabilities & Owner’s Equity $TA

    Henry’s firm after going public.
      Henry shares ownership with new (outside) shareholders.
      Henry’s actions constrained by bank and other
         shareholders.
        Bank continues to bear some risk.
        All shareholders bear residual risk.
                                                                    15

1-15
           The Firm as an Investment Vehicle

                               The Firm                    Financial
                                                           Markets




    The                    Investment Financing      Exchange of
                            Decisions Decisions       Money and        Investors
   World                                           Financial Assets


             Exchange of
             Money and
             Real Assets
                                                            Financial
                                                         Intermediaries


  Three Main Areas           Corporate Financial     Financial Markets    Investments
                                                                                16
     of Finance:                Management           and Intermediaries
1-16
            The Accounting Model of the Firm:
                   A Balance Sheet
         The Investment Decision             The Financing Decision

               Current Assets                   Current Liabilities
        Cash                                  Accounts Payable
        Marketable Securities                 Current Debt
        Accounts Receivable
        Inventory                      Net Working Capital =CA - CL

                                              Long-Term Liabilities
                                             Long-Term Bank Debt
                                             Bonds

            Total Fixed Assets                 Shareholder’s Equity
       Tangible Fixed Assets                 Common Stock
       Intangible Fixed Assets               Retained Earnings        17

1-17                Total Assets   =        Liabilities.+ O.E.
       Set of Contracts Model of the Firm
                              Bondholders              Banks

            Employees                                          Customers


       Environment                                                 Governments


     Common                                                                  Preferred
   Stockholders                        The Firm                            Stockholders


         Society                                                   Communities



                  Suppliers                                     Creditors
                                            Managers                                 18

1-18
   The Evolution of Finance

        Globalization
           Every firm operates in a global marketplace.
           Financial markets transcend national boundaries.
        Technology
           Information can be readily obtained / disseminated.
           Need to use computing technology to maintain a
            competitive edge.
        Corporate Reorganization and Restructuring
          Your first job will not be the job you retire from.
                                                                  19

1-19

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:12
posted:9/22/2011
language:English
pages:19