FINANCIAL MNGT (Chapter 1)
Concerns the acquisition, financing, and managemnet of asstes with some overall goals in mind.
Financial Management
It can be broken down into three major areas: Investment decision, financing decision, asset-management decision.
Decision Function of Financial Management
Determine the total amount of assets needed to be held by the firm.
Investment decision
Determine how the asset (LHS of Balance Sheet) will be financed (RHS of Balance Sheet).
Have large amount of debt or debt free.
Financing Decision
Financing Decisions
Once assets have been acquired and appropriate financing provided, these assets must be managed efficiently.
Asset Management Decisions
Asset Management Decision
Has varying degrees of operating responsibility over assets.
Financial Manager
Is the outstanding number of share times market value per share.
Shareholders Wealth
Is a reflection of a firms investment, financing and asset management decisions.
Market price per share of the firms common stock
Occurs when we maximize the share price for current shareholders.
Value Creation
Maximizing a firms earnings after taxes.
Profit Maximization
Maximizing earnings after taxes dividend by share outstanding.
Earnings per share maximization
Serves as a barometer for business performance
Share Price
There exists a seperation between owners and managers
Modern Corporation
Acts as an agent for the owners (shareholders) of the firm.
Management
Is an individual authorized by another person, called the principal, to act in the latter behalf.
Agent
When there is a conflict of interest between the agent and principal
Agency Problem
Developed a theory of the firm based on agency arrangement known as the agency theory
Jensen and Meckling
The agents will make optimal decisions if appropriate incentives are given and only uf agents are monitored.
Agency Theory
Include stock options, perquisites, and bonuses.
Incentives
Incolves auditing financial statements, reviewing management perquisites and limit management decisions.
Monitoring
Does not preclufe the firm from being socially responsible, scuh as protecting the customer, paying fair wages to employees, fair hiring practices, safeworking conditions, and becoming invloved in environmental issues like clean air and water.
Wealth Maximization
11 Organizational stakeholders
Employees
Unions
Shareholders
Communities
Suppliers
Media
Governments
Trade and Industry
Competitors
Social and Political Action Group
Customers