Lecture Essentials of corporate finance (2/e) – Chap 1: Introduction to financial management

Introduction to financial
management
Chapter 1


Key concepts and skills
• Have a good understanding of the:
– basic types of financial management
decisions and the role of the financial
manager
– goal of financial management
– financial implications of the different forms
of business organisation
– conflicts of interest that can arise between
managers and owners
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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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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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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
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The four basic areas of
finance
1. Corporate finance or business finance
2. Investments
3. Financial institutions
4. International finance

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Investments
• Working with financial assets such as
shares and bonds
• Value of financial assets, risk versus
return and asset allocation
• Job opportunities
– Stockbroker
– Financial advisor
– Portfolio manager

– Security analyst
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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Financial institutions
• Companies that specialise in financial
matters
– Banks─commercial and investment, credit
unions, savings and loans
– Insurance companies
– Brokerage firms

• Job opportunities
Copyright © 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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International finance
• This is an area of specialisation within one
of the areas discussed so far.
• Involves international aspects of corporate
finance or investments or financial
institutions.

• 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 you would benefit from
fluency in a foreign language.
Copyright © 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Why study finance?
• Marketing
– Budgets, marketing research, marketing financial
products

• Accounting
– Dual accounting and finance function, preparation
of financial statements

• Management
– Strategic thinking, job performance and
profitability

• Personal finance
– Budgeting, retirement planning, university
planning,

day-to-day
flow management
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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
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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?
Copyright © 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Financial manager
• Financial managers try to answer some

or all of these questions.
• The top financial manager within a firm
is usually the chief financial officer
(CFO).
– Treasurer: oversees cash management,
credit management, capital expenditure
and financial planning
– Accountant: oversees taxes, cost
accounting, financial accounting and data
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A simplified organisational
chart
Figure 1.1

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
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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?
Copyright © 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Forms of business
organisations
• Three major forms in Australia and New
Zealand
1. Sole proprietorship
2. Partnership
• General
• Limited

3. Corporation

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Sole proprietorship

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
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Partnership

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Corporation

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
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International corporate
forms
• Joint stock companies
• Public limited companies
• Limited liability companies
• All share:
– public ownership
– limited liability
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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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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 per share of
the company’s existing stock?
– Maximise the market value of the
existing owners’ equity?
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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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The agency problem
• Agency relationship
– Principal hires an agent to represent their
interests.
– 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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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Do managers act in
shareholders’ interests?
• Managerial compensation
– Incentives can be used to align
management and shareholder interests.

– The incentives need to be structured
carefully to make sure that they achieve
their goals.

• Corporate control
– The threat of a takeover may result in better
management.

• Other stakeholders
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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Example: Work the Web
• The Internet provides a wealth of
information about individual companies.
• < is an
excellent website.

Copyright © 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Cash flows between the firm and

the financial markets
Figure 1.2

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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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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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PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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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 occur within a corporation?
Copyright © 2011 McGraw-Hill Australia Pty Ltd
PPTs t/a Essentials of Corporate Finance 2e by Ross et al.
Slides prepared by David E. Allen and Abhay K. Singh

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Chapter 1
END

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