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    The Role of Financial Management: Instructor: Ajab Khan Burki

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    Gaurav Karki
    This document is the first chapter of a financial management textbook. It introduces financial management and discusses the goal of maximizing shareholder wealth. It also covers the key financial decisions around investments, financing, and asset management. Finally, it discusses the roles and organization of management in a modern corporation.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    The Role of Financial Management: Instructor: Ajab Khan Burki

    Uploaded by

    Gaurav Karki
    63 views20 pages
    This document is the first chapter of a financial management textbook. It introduces financial management and discusses the goal of maximizing shareholder wealth. It also covers the key financial decisions around investments, financing, and asset management. Finally, it discusses the roles and organization of management in a modern corporation.

    Original Description:

    finance1

    Original Title

    CH1

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    This document is the first chapter of a financial management textbook. It introduces financial management and discusses the goal of maximizing shareholder wealth. It also covers the key financial decisions around investments, financing, and asset management. Finally, it discusses the roles and organization of management in a modern corporation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    63 views20 pages

    The Role of Financial Management: Instructor: Ajab Khan Burki

    Uploaded by

    Gaurav Karki
    This document is the first chapter of a financial management textbook. It introduces financial management and discusses the goal of maximizing shareholder wealth. It also covers the key financial decisions around investments, financing, and asset management. Finally, it discusses the roles and organization of management in a modern corporation.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 20

    Chapter 1

    The Role of Financial


    Management
    Instructor: Ajab Khan Burki

    1-1
    The Role of
    Financial Management

    ● What is Financial
    Management?
    ● The Goal of the Firm
    ● Organization of the Financial
    Management Function

    1-2
    What is Financial
    Management?

    Concerns the acquisition,


    financing, and
    management of assets
    with some overall goal in
    mind.
    1-3
    Investment Decisions
    Most important of the three
    decisions.
    ● What is the optimal firm size?
    ● What specific assets should be
    acquired?
    ● What assets (if any) should be
    reduced or eliminated?
    1-4
    Financing Decisions
    Determine how the assets (LHS of
    balance sheet) will be financed (RHS
    of balance sheet).
    ● 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?
    1-5
    Asset 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.

    1-6
    What is the Goal
    of the Firm?

    Maximization of
    Shareholder
    Wealth!
    Value creation occurs when
    we maximize the share
    1-7 price for current
    Shortcomings of
    Alternative Perspectives
    Profit Maximization
    ● Maximizing a firm’s earnings after taxes.
    Problems
    ● Could increase current profits while
    harming firm (e.g., defer maintenance,
    issue common stock to buy T-bills, etc.).
    ● Ignores changes in the risk level of the
    firm.
    1-8
    Shortcomings of
    Alternative Perspectives
    Earnings per Share Maximization
    ● Maximizing earnings after taxes divided
    by shares outstanding.
    Problems
    ● Does not specify timing or duration of
    expected returns.
    ● Ignores changes in the risk level of the firm.
    ● Calls for a zero payout dividend policy.
    1-9
    Strengths of Shareholder
    Wealth Maximization
    ● Takes account of: current and future
    profits and EPS; the timing,
    duration, and risk of profits and EPS;
    dividend policy; and all other
    relevant factors.
    ● Thus, share price serves as a
    barometer for business performance.
    1-10
    The Modern Corporation

    Modern Corporation

    Shareholders Management

    There exists a SEPARATION


    between owners and managers.
    1-11
    Role of Management
    Management acts as an agent
    for the owners (shareholders)
    of the firm.
    ● An agent is an individual
    authorized by another person,
    called the principal, to act in
    the latter’s behalf.
    1-12
    Agency Theory

    ● Jensen and Meckling developed


    a theory of the firm based on
    agency theory.
    ● Agency Theory is a branch of
    economics relating to the
    behavior of principals and their
    agents.
    1-13
    Agency Theory

    ● Principals must provide incentives


    so that management acts in the
    principals’ best interests and then
    monitor results.
    ● Incentives include stock options,
    perquisites, and bonuses.

    1-14
    Social Responsibility
    ● Wealth maximization does not
    preclude the firm from being socially
    responsible.
    ● Assume we view the firm as producing
    both private and social goods.
    ● Then shareholder wealth maximization
    remains the appropriate goal in
    governing the firm.
    1-15
    Organization of the Financial
    Management Function

    Board of Directors

    President
    (Chief Executive Officer)

    Vice President VP of Vice President


    Operations Finance Marketing

    1-16
    Organization of the Financial
    Management Function

    VP of Finance
    Treasurer Controller
    Capital Budgeting Cost Accounting
    Cash Management Cost Management
    Credit Management Data Processing
    Dividend Disbursement General Ledger
    Fin Analysis/Planning Government Reporting
    Pension Management Internal Control
    Insurance/Risk Mngmt Preparing Fin Stmts
    Tax Analysis/Planning Preparing Budgets
    Preparing Forecasts
    1-17
    Texas Instruments BAII+

    ● Integrated
    throughout the
    chapters
    ● A useful financial
    tool
    ● Does NOT replace
    financial
    understanding

    1-18
    Change Display Setting

    Change the decimal


    places displayed from
    “2” to “Floating”
    Press:
    2nd Format
    9 ENTER
    2nd QUIT

    1-19
    Change Periods
    per Year Setting
    Change the periods per
    year from “12” to “1”

    Press:
    2nd P/Y
    1 ENTER
    2nd QUIT

    1-20

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