An Overview of Financial and Multinational Financial Management

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An Overview of Financial and Multinational
Financial Management

• Corporate Finance

Dr. A. DeMaskey
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Learning Objectives

• Questions to be answered
• What is the role of financial management?
• What are the three main areas of finance?
• How are companies organized?
• What are the goals of the corporation?
• What key trends are affecting financial
  management today?
• What factors make multinational financial
  management different?
• What agency relationships exist within
  corporations?

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What three questions does financial management
seek to answer?

• What causes a company to have a particular stock
  value?
• How can managers make choices that add value to
  their companies?
• How can managers ensure that their companies
  dont run out of cash while executing their
  plans?

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The Field of Finance

• Capital Markets/Financial Institutions
• Investments
• Financial Management

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Financial Decisions Within the Firm

• Investment Decisions
• Financial Decisions
• Both

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Financial Management and Analysis

• Financial Management
• Financial Analysis

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Alternative Forms ofBusiness Organization

• Sole proprietorship
• Partnership
• Corporation

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Sole Proprietorship

• Advantages
• Ease of formation
• Subject to few regulations
• No corporate income taxes
• Disadvantages
• Limited life
• Unlimited liability
• Difficult to raise capital

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Partnership

• A partnership has roughly the same advantages and
  disadvantages as a sole proprietorship.

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Corporation

• Advantages
• Unlimited life
• Easy transfer of ownership
• Limited liability
• Ease of raising capital
• Disadvantages
• Double taxation
• Cost of set-up and report filing

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Goals of the Corporation

• The primary goal is shareholder wealth
  maximization, which translates to maximizing
  stock price.
• Should firms behave ethically? YES!
• Do firms have any responsibilities to society at
  large? YES! Shareholders are also members of
  society.

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Goals of the Corporation

• Maximizing the owners wealth
• Maximizing shareholders wealth
• Maximizing the price per share
• Maximizing economic profits

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Economic Profit Versus Accounting Profit

• Economic profit
• Opportunity cost
• Normal profit
• Accounting profit
• Ignores opportunity costs and normal profits
• Does not reflect the firms actual cash flows

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Is maximizing stock price good for society,
employees, and customers?

• Employment growth is higher in firms that try to
  maximize stock price. On average, employment goes
  up in
• firms that make managers into owners (such as LBO
  firms)
• firms that were owned by the government but that
  have been sold to private investors

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Is maximizing stock price good for society,
employees, and customers?

• Consumer welfare is higher in capitalist free
  market economies than in communist or socialist
  economies.
• Fortune lists the most admired firms. In
  addition to high stock returns, these firms have
• high quality from customers view
• employees who like working there

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Factors That Affect the Firms Stock Price

• Internal Factors
• Amount of cash flows expected by shareholders
• Timing of the cash flow stream
• Risk of the cash flows
• Use of debt
• Dividend policy

• External Factors
• Legal constraints
• General level of economic activity
• Tax laws
• Conditions in the stock market
• Investor expectations

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Three Determinants of Cash Flows

• Sales
• Current level
• Short-term growth rate in sales
• Long-term sustainable growth rate in sales
• Operating expenses
• Capital expenses

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Factors that Affect the Level and Risk of Cash
Flows

• Decisions made by financial managers
• Investment decisions (product lines, production
  processes, geographic market, use of technology,
  marketing strategy)
• Financing decisions (choice of debt policy and
  dividend policy)
• The external environment

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Financial ManagementIssues of the New Millennium

• Use of computers and electronic transfers of
  information
• The globalization of business
• Corporate governance

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Agency Relationships

• An agency relationship exists whenever a
  principal hires an agent to act on his or her
  behalf.
• Within a corporation, agency relationships exist
  between
• Shareholders and managers
• Shareholders and creditors

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Shareholders versus Managers

• Managers are naturally inclined to act in their
  own best interests.
• But the following factors affect managerial
  behavior
• Managerial compensation plans
• Direct intervention by shareholders
• The threat of firing
• The threat of takeover

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Shareholders versus Creditors

• Shareholders (through managers) could take
  actions to maximize stock price that are
  detrimental to creditors.
• In the long run, such actions will raise the cost
  of debt and ultimately lower stock price.

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What is a multinational corporation?

• A multinational corporation is one that operates
  in two or more countries.
• At one time, most multinationals produced and
  sold in just a few countries.
• Today, many multinationals have world-wide
  production and sales.

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Why do firms expand into other countries?

• To seek new markets
• To seek new supplies of raw materials
• To gain new technologies
• To gain production efficiencies
• To avoid political and regulatory obstacles
• To reduce risk by diversification

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What are the major factors that distinguish
multinational from domestic financial management?

• Exchange rate risk
• Currency differences
• Economic risk
• Political risk
• Government roles
• Cultural, legal, and institutional differences
• Cultural differences
• Language differences
• Legal differences