Chapter 1 An Overview of Managerial Finance

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Chapter 1An Overview of Managerial Finance
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Career Opportunities in Finance

• Financial Markets and Institutions
• Investments
• Managerial Finance

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Managerial Finance in the Twentieth Century

• Business globalization
• Information technology
• Regulatory attitude of the government
• Prosperous economy business friendly
• Poor economy consumer/investor friendly

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Alternative Forms of Business Organization

• Proprietorship
• 71 of all businesses
• 90 have assets under 100,000
• Partnership
• 9 of all businesses
• Corporation
• 20 of all businesses
• 85 of all dollar value of sales

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Proprietorship

• Advantages
• Ease of formation
• Subject to few government regulations
• No corporate income taxes
• Limitations
• Unlimited personal liability
• Difficult to raise capital
• Transferring ownership is difficult
• Limited life

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Partnership

• Like a proprietorship, except two or more owners
• A partnership has roughly the same advantages and
  limitations as a proprietorship

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Corporation

• Advantages
• Unlimited life
• Easy transfer of ownership
• Limited liability
• Ease of raising capital
• Disadvantages
• Double taxation
• Earnings taxed at corporate level
• Dividends taxed as income to stockholders
• Cost of set-up and report filing

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Finance in the Organizational Structure of the
Firm
Board of Directors
President
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The Financial Managers Responsibilities

• Forecasting and planning
• Major investment and financing decisions
• Coordination and control
• Dealing with financial markets

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Goals of the Corporation

• Primary goal
• maximize stockholder wealth
• maximize stock price
• Managerial incentives
• controlled by competitive forces
• Social responsibility
• must be mandated initially to reduce
  disadvantages
• Stock price maximization and social welfare
• Maximizing stock benefiting society

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Managerial Actions to Maximize Stockholder Wealth

• Capital Structure Decisions
• How much and what types of debt and equity should
  be used to finance the firm?
• Capital Budgeting Decisions
• What types of assets should be purchased to help
  generate cash flows?
• Dividend Policy Decisions
• What should be done with net cash flows generated
  by the firmreinvest or pay dividends?

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How Managers Actions Affect Stock Price

• Projected earnings per share
• Net Income/ of shares
• Timing of earnings streams
• The sooner the better
• Riskiness of projected earnings
• The safer the better
• Use of debt (capital structure)
• Dividend policy

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Value of the Firm
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Agency Relationships

• An agency relationship when a principal hires
  an agent to act on their behalf
• Within corporations, agency relationships exist
  between
• Stockholders and managers
• Stockholders and creditors

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Stockholders versus Managers

• Managers are naturally inclined to act in their
  own best interests.
• But the following factors affect managerial
  behavior
• The threat of firing
• The threat of takeover
• Structuring managerial incentives
• Performance Shares
• Executive Stock Options
• Restricted Stock Grants

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Stockholders versus Creditors

• Stockholders (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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The External Environment
Summary of Major Factors Affecting Stock Prices
External Constraints 1. Antitrust Laws 2.
Environmental Regulations 3. Product and
Workplace Safety Regulations 4. Employment
Practices Rules 5. Federal Reserve
Policy 6. International Developments
Level of Economic Activity and Corporate Taxes
Stock Market Conditions
Strategic Policy Decisions Controlled by
Management 1. Types of Products and Services
Produced 2. Production Methods Used 3.
Relative Use of Debt Financing 4. Dividend policy
Expected Profitability
Timing of Cash Flows
Stock Price
Degrees of Risk
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Business Ethics

• Webster A standard of conduct and moral
  behavior.
• Business Ethics A companys attitude and
  conduct toward its employees, customers,
  community, and stockholders
• Sarbanes-Oxley Act of 2002
• accounting standards
• How is ethical behavior profitable?

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Forms of Business in Other Countries

• U.S. firms have a more dispersed ownership
  open
• Non-US firms have higher concentrations of
  ownership
• Many firms are not publicly traded
• Less ownership by individuals
• Nature of relationship with financial
  institutions differs from U.S.
• Banks are less regulated
• Banks can finance large companies, keeping them
  private
• Shareholders assign banks their proxy votes for
  the directors of companies

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Multinational CorporationsFirms that operate in
two or more countries
Five reasons firms go international

• 1. To seek new marketse.g., Coke
• 2. To seek raw materiale.g., Exxon Mobil
• 3. To seek new technologye.g., Xerox
• 4. To seek production efficiencye.g., GM
• 5. To avoid political and regulatory
  hurdlese.g., Honda, Nissan, Toyota

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Factors Distinguishing Domestic Firms from
Multinational Firms

1. Different currency denominations
2. Economic and legal ramifications
3. Language differences
4. Cultural differences
5. Role of governments
6. Political risk