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PowerPoint PresentationFinancial Management And

PolicyTwelfth Editionby

2002 Prentice Hall Publishing

James C. Van HorneStanford University

Prepared by

Memphis Viveros

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Chapter 1Goals and Functions

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Finance

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Financial Goal

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WealthWealth

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Objective of a Company

Create value for its shareholdersCreate value for its shareholders Market price of common stock (C/S)Market price of common stock (C/S)

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InvestmentInvestment

FinancingFinancing

Dividend/share repurchaseDividend/share repurchase

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Value Creation

Niche in an attractive industryNiche in an attractive industry

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Maximization of EPS

Does not considerDoes not consider TimingTiming

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Risk or uncertaintyRisk or uncertainty

DividendsDividends

Usually is not the same as maximizingUsually is not the same as maximizing

market price per sharemarket price per share

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Dealing With Agency Problems

IncentivesIncentives Stock optionsStock options

BonusesBonuses

MonitoringMonitoring BondingBonding

ReviewinReviewin

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PerquisitesPerquisites AuditingAuditing

LimitingLimiting

managementmanagement

decisionsdecisions

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Principle of Maximization ofShareholder Wealth

Rational guide for running a businessRational guide for running a business

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Objective in making financial decisionsObjective in making financial decisions

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Allocation of Savings in anEconomy

Occurs on the basis of expected risk andOccurs on the basis of expected risk and

returnreturn

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Market value of common stock reflects theMarket value of common stock reflects the

markets trademarkets trade--off between risk and returnoff between risk and return

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Social Responsibility

Protecting consumersProtecting consumers Paying fair wagesPaying fair wages

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Maintaining safe working conditionsMaintaining safe working conditions

Supporting educationSupporting education

Involved in environmental issuesInvolved in environmental issues

Impact on stakeholdersImpact on stakeholders

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Functions of Finance

Investment decisionsInvestment decisions

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Dividend/share repurchase decisionDividend/share repurchase decision

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New Investment Decision Most important of three functionsMost important of three functions

Allocation/reallocation of capitalAllocation/reallocation of capital

DeterminesDetermines

The total amount of assetsThe total amount of assets

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Composition of assetsComposition of assets BusinessBusiness--risk complexion of the firmrisk complexion of the firm

Appropriate acceptance criterionAppropriate acceptance criterion(or required rate of return)(or required rate of return)

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Existing Investment Decision

Efficient management of current assetsEfficient management of current assets

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Allocating capital to fixed assetsAllocating capital to fixed assets

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External InvestmentOpportunities

Mergers and acquisitionsMergers and acquisitions

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Domestic and internationalDomestic and international

Globalization of financeGlobalization of finance

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Financing Decision

Determining the best financing mixDetermining the best financing mix

Optimal capital structureOptimal capital structure

Maximize market price per shareMaximize market price per share

Variation in capital structure can impact firm valueVariation in capital structure can impact firm value

Interface ith ca ital marketsInterface ith ca ital markets

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EverEver--changing environmentchanging environment

Manage financial risk with hedging devicesManage financial risk with hedging devices

Corporate restructuringCorporate restructuring

New financing sourcesNew financing sources

Existing financing sourcesExisting financing sources

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Dividend/Share Repurchase

Decision

Amount of cash to distribute to stockholdersAmount of cash to distribute to stockholders

Dividend policyDividend policy % of earnings paid% of earnings paid

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Stock dividendStock dividend

SplitsSplits

Share repurchaseShare repurchase Determines the amount of earnings retainedDetermines the amount of earnings retained

Financial signals to the marketFinancial signals to the market

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Making Optimal Decisions

Interrelated decisionsInterrelated decisions

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Financial analysisFinancial analysis