Chapter 1 -- The Role of Financial Management© 2001 Prentice-Hall, Inc.
Created by: Gregory A. Kuhlemeyer, Ph.D.
Carroll College, Waukesha, WI
Organization of the Financial Management Function
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What is Financial Management?
Concerns the acquisition, financing, and management of assets with some overall goal in mind.
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Investments
Financial Management
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What assets (if any) should be reduced or eliminated?
Most important of the three decisions.
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What is the best financing mix?
What is the best dividend policy?
How will the funds be physically acquired?
Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet).
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Financial Manager has varying degrees of operating responsibility over assets.
Greater emphasis on current asset management than fixed asset management.
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Maximization of Shareholder Wealth!
Value creation occurs when we maximize the share price for current shareholders.
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Profit Maximization
Projected EPS
Timings of the earnings
Use of debt financing
Stock price maximization requires
Low cost business, high quality goods at lowest possible cost
Development of products that customer needs and want
Efficient service, adequate stock of merchandise, well located business establishments (factors that leads to sales)
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Modern Corporation
Role of Management
An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.
Management acts as an agent for the owners (shareholders) of the firm.
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Agency Theory
Agency Theory is a branch of economics relating to the behavior of principals and their agents.
Jensen and Meckling developed a theory of the firm based on agency theory.
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Conflicts Between Managers and Stockholders
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Agency Theory
Principals must provide incentives so that management acts in the principals’ best interests and then monitor results.
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Following factors affect managerial behavior:
Managerial compensation plans
Maximize stock value by:
Managing risk
Social Responsibility
Safe working environment
fair employment practices
community involvement
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Some Important Trends
Recent corporate scandals have reinforced the importance of business ethics, and have spurred additional regulations and corporate oversight.
The effects of changing information technology have had a profound effect on all aspects of business finance.
The continued globalization of business.
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