Transcript Business owned by two or more persons

FOUNDATIONS OF
FINANCIAL MANAGEMENT
Ohio University
College of Business
How do we learn?

There are primarily seven ways
How do we learn?
1.
2.
3.
4.
5.
6.
7.
Discussion
Practice doing
Reading
Lecture
Audiovisual
Teach others
Demonstration
What do you think of when
someone says “finance”?
Why is finance important personally?
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
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We need money to live (food, clothing, shelter) and
we probably want money for a great number of
things (concert tickets, cars, computers, etc.).
Run your own firm - how to invest and how to raise
money.
Teaches us to understand the other side of every
transaction. If you understand what your employer
wants, it is easier to achieve this and hence you are
in a better position for raises and promotions.
Why is finance important personally?
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Few people will not work their entire life at the
same firm. Knowing in advance your financial
position and options dramatically reduces your
stress in this time of change.
Taxes can take 40% of what we earn. Making the
right investments can cut this tax burden.
Star athletes have gone from making millions to flat
broke.
US Fiscal Condition
United States Tax revenue: $2,170,000,000,000
Fed budget:
$3,820,000,000,000
New debt:
$1,650,000,000,000
National debt: $14,271,000,000,000
Recent budget cut: $38,500,000,000
Make the #s relevant
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on credit card: $142,710
Total budget cuts: $385
http://www.youtube.com/watch?v=Li0no7O9zmE
How is Finance related
to other fields?

Marketing


Accounting

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Dual accounting and finance function, preparation of
financial statements
Management


Budgets, marketing research, marketing financial products
Strategic thinking, job performance, profitability
Personal finance

Budgeting, retirement planning, college planning, day-today cash flow issues
Daniel Pink –
Does $ Increase Performance?
http://www.youtube.com/watch?v=u6XAPnuFjJc
Finance: The Art and Science
of Managing Money
Finance Utilizes?


Economics
Accounting
Financial analysis is like a…
Analyst’s opinion of GM
Dec 07
Strong Buy
Buy
Hold
Underperform
Sell
4
3
7
3
1
What do you see?
What do you see?
What do you see?
Count every “F” below?
FINISHED FILES ARE THE RE
SULT OF YEARS OF SCIENTI
FIC STUDY COMBINED WITH
THE EXPERIENCE OF YEARS...
What number goes in the triangle?
Organizations that hire
Finance Grads
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Banks
Insurance Companies
Any Large Business
Investment Bankers
Stockbrokers
Careers in Finance
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Commercial Banking
Financial Planning
Insurance
Real Estate
Money Management
Corporate Finance
Overview of Semester
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Intro to Finance
Accounting Review
Financial Statement Analysis
Time Value of Money
Capital Budgeting
Stock and Bond Valuation
CHAPTER 1
AN OVERVIEW OF FINANCIAL
MANAGEMENT




Forms of Businesses
Goals of the Corporation
Agency Relationships
Ethics in Finance
Key Concepts and Skills
Have a good understanding of:
 The basic types of financial management
decisions and the role of the financial manager
 The goal of financial management
 The financial implications of the different forms
of business organization
 The conflicts of interest that can arise between
owners and managers
Basic Areas Of Finance
1.
2.
3.
4.
Corporate finance = Business Finance
Investments
Financial institutions
International finance
Investments

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Work with financial assets such as stocks and bonds
Value of financial assets, risk versus return, and
asset allocation
Job opportunities
 Stockbroker
or financial advisor
 Portfolio manager
 Security analyst
Financial Institutions

Companies that specialize in financial matters
 Banks
– commercial and investment, credit unions,
savings and loans
 Insurance companies
 Brokerage firms

Job opportunities
International Finance
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An area of specialization within each of the areas
discussed so far
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;
speaking a foreign language fluently is also helpful
Why Study Finance?

Marketing


Accounting


Dual accounting and finance function, preparation of
financial statements
Management


Budgets, marketing research, marketing financial products
Strategic thinking, job performance, profitability
Personal finance

Budgeting, retirement planning, college planning, day-today cash flow issues
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 investments?
 How will we manage the everyday financial activities
of the firm?
Financial Manager

The top financial manager within a firm is usually the
Chief Financial Officer (CFO)
Treasurer – oversees cash management, credit management,
capital expenditures, and financial planning
 Controller – oversees taxes, cost accounting, financial
accounting, and data processing

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?
Financial managers try to answer some, or all, of these
questions
Forms of Business Organization
Three major forms in the United States
Sole
proprietorship
Partnership
 General
 Limited
Corporation
 S-Corp
 Limited
liability company (LLC)
Sole Proprietorship
Business owned by one person
 Advantages
 Disadvantages
 Easiest
to start
 Least regulated
 Single owner keeps all
of the profits
 Taxed once as personal
income
 Limited
to life of owner
 Equity capital limited to
owner’s personal wealth
 Unlimited liability
 Difficult to sell ownership
interest
Partnership
Business owned by two or more persons

Advantages
 Two

or more owners
 More capital available
 Relatively easy to start
 Income taxed once as
personal income
Disadvantages
 Unlimited
liability
 Partnership dissolves
when one partner dies
or wishes to sell
 Difficult to transfer
ownership
Corporation
A legal “person” distinct from owners and a
resident of a state
 Advantages
 Disadvantages
 Limited
liability
 Separation of ownership
and management
 Unlimited life
(agency problem)
 Separation of ownership
 Double taxation (income
and management
taxed at the corporate
 Transfer of ownership is
rate and then dividends
easy
taxed at personal rate,
 Easier to raise capital
while dividends paid are
not tax deductible)
International Corporate Forms

All of these forms feature public ownership and
limited liability
Financial Goals of the Corporation

The primary financial goal is _______________.
Goal Of Financial Management

What should be the goal of a corporation?
 Maximize
the market value of the existing
owners’ equity
 Maximize the current value per share of the
company’s existing stock
Goal Of Financial Management

Does this mean we should do anything and
everything to maximize owner wealth?
 Outsourcing?
 Off-shoring?
 Enron?
 Corporate
support of charities?
http://globalpublicsquare.blogs.cnn.com/2012/09/27/why-outsourcing-shouldnt-be-a-dirty-word/
Why not maximize profits?
Is stock price maximization the same as
profit maximization?


No, despite a generally high correlation amongst
stock price, EPS, and cash flow.
Some actions may cause an increase in earnings,
yet cause the stock price to decrease (and vice
versa).
The goal of the financial manager is to
maximize the value of the firm.
What determines a firm’s value?

A firm’s value is the present value of all future cash
flows.
Market Capitalizations
AFLAC Inc.
Apple Inc.
Best Buy Co., Inc.
Exxon Mobil Corporation
Ford Motor Co.
Google Inc.
Microsoft Corporation
Starbucks Corporation
Wal-Mart Stores Inc.
Apple Inc.
Exxon Mobil
Google Inc.
Microsoft Corporation
Wal-Mart Stores Inc.
Ford Motor Co.
Starbucks Corporation
AFLAC Inc.
Best Buy Co., Inc.
481B
429B
375B
293B
250B
63B
56B
30B
12B
What is Ethical Behavior?

Ethical behavior tends to be good for business and
involves demonstrating respect for key moral
principles that include honesty, fairness, equality,
dignity, diversity and individual rights.
Agency relationships

An agency relationship exists whenever a principal
hires an agent to act on their behalf.
Agency relationships


An agency relationship exists whenever a principal
hires an agent to act on their behalf.
Within a corporation, agency relationships exist
between:
 Shareholders
and managers
Shareholders versus Managers

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Managers are naturally inclined to act in their own
best interests.
But the following factors affect managerial
behavior:
 Stock
option plans
 The threat of firing (Board of Directors, large
stockholder, other managers)
 The threat of takeover
There's No Such Thing As "Business" Ethics :
There's Only One Rule for Making Decisions
Sarbanes-Oxley Act of 2002
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Major focus is to make sure that publicly-traded
corporations accurately present their financial
statements.
Longer jail sentences
Made CEOs responsible for the fin. stmts.
Sarbanes-Oxley Act

Driven by corporate scandals
 Enron,
Tyco, WorldCom, Adelphia
Intended to strengthen protection against
accounting fraud and financial malpractice
 Compliance very costly

 Firms
 Go
driven to:
public outside the U.S.
 Go private (“go dark”)