1-1 Chapter 1 The Role of Financial Management © 2001 Prentice-Hall, Inc. Fundamentals of Financial Management, 11/e Created by: Gregory A. Kuhlemeyer, Ph.D. Carroll College, Waukesha, WI

1-2 The Role of Financial Management u What is Financial Management? u The Goal of the Firm u Organization of the Financial Management Function

1-3 What is Financial Management? overall goal Concerns the acquisition, financing, and management of assets with some overall goal in mind.

1-4 Investment Decisions u What is the optimal firm size? u What specific assets should be acquired? u What assets (if any) should be reduced or eliminated? Most important of the three decisions.

1-5 Financing Decisions u What is the best type of financing? u What is the best financing mix? u What is the best dividend policy? u How will the funds be physically acquired? Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet).

1-6 Asset Management Decisions u How do we manage existing assets efficiently? u Financial Manager has varying degrees of operating responsibility over assets. u Greater emphasis on current asset management than fixed asset management.

1-7 What is the Goal of the Firm? Maximization of Shareholder Wealth! Value creation occurs when we maximize the share price for current shareholders.

1-8 Shortcomings of Alternative Perspectives u Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.). u Ignores changes in the risk level of the firm. Profit Maximization u Maximizing a firms earnings after taxes.Problems

1-9 Shortcomings of Alternative Perspectives u Does not specify timing or duration of expected returns. u Ignores changes in the risk level of the firm. u Calls for a zero payout dividend policy. Earnings per Share Maximization u Maximizing earnings after taxes divided by shares outstanding.Problems

1-10 Strengths of Shareholder Wealth Maximization current and future profits and EPSthe timing, duration, and risk of profits and EPS dividend policy u 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. share price u Thus, share price serves as a barometer for business performance.

1-11 The Modern Corporation There exists a SEPARATION between owners and managers. Modern Corporation ShareholdersManagement

1-12 Role of Management agent u An agent is an individual authorized by another person, called the principal, to act in the latters behalf. agent Management acts as an agent for the owners (shareholders) of the firm.

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

1-14 Agency Theory stock options, perquisites, bonuses u Incentives include stock options, perquisites, and bonuses. incentives monitor u Principals must provide incentives so that management acts in the principals best interests and then monitor results.

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

1-16 Organization of the Financial Management Function Board of Directors President (Chief Executive Officer) Vice President Operations Vice President Marketing VP of Finance

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

1-18 Texas Instruments BAII+ u Integrated throughout the chapters u A useful financial tool u Does NOT replace financial understanding

1-19 Change Display Setting Change the decimal places displayed from 2 to Floating Press: 2 nd Format 9ENTER 2 nd QUIT

1-20 Change Periods per Year Setting Change the periods per year from 12 to 1 Press: 2 nd P/Y 1ENTER 2 nd QUIT