Lecture Essentials of corporate finance - Chapter 1: Introduction to financial management

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.

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Copyright  2007 McGraw-Hill Australia Pty Ltd

PPTs t/a Essentials of Corporate Finance by Ross, Trayler,

Bird, Westerfield & Jordan

Slides prepared by Rowan Trayler

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Introduction to Financial Management

Chapter 1

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Key Concepts and Skills

 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

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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

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Financial Institutions

• Companies that specialise in financial matters

– Banks – commercial and investment, credit unions

– Insurance companies

– Brokerage firms

• Job opportunities

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International Finance

• This is an area of specialisation among all of the

areas discussed so far

• 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 speaking a foreign language fluently is also

helpful

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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?

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– Treasurer – oversees cash management, credit

management, capital expenditure and financial planning

– Accountant – oversees taxes, cost accounting, financial accounting and data processing

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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 do we manage the day-to-day finances of the firm?

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– Limited to life of owner

– Equity capital limited to owner’s personal wealth

– Unlimited liability

– Difficult to sell ownership interest

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Partnership

• Advantages

– Two or more owners

– More capital available

– Relatively easy to start

– Income taxed once as

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Goal of Financial Management

• What should be the goal of a corporation?

– Maximise profit?

– Minimise costs?

– Maximise market share?

– Maximise the current value of the company’s shares?

• Does this mean we should do anything and

everything to maximise owner wealth?

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The Agency Problem

• Agency relationship

– Principal hires an agent to represent their interest

– Shareholders (principals) hire managers (agents) to run the company

• Agency problem

– Conflict of interest between principal and agent

• Management goals and agency costs

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Figure 1.2

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Financial Markets

• Cash flows to the firm

• Primary vs secondary markets

– Dealer vs auction markets

– Listed vs private companies

• Australian Securities Exchange (ASX)

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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 do they exist within a corporation?

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