Fin 220
Dr. B. Asiri
Sept 2010
Chapter 1
An Overview of
Managerial Finance
© 2005 Thomson/South-Western
Career Opportunities in
Finance
 Financial Markets and Institutions
 Investments
 Managerial Finance
2
Alternative Forms of
Business Organization
 Proprietorship
 Partnership
 Corporation
3
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
4
Partnership
 Like a proprietorship, except two or
more owners
 A partnership has roughly the same
advantages and limitations as a
proprietorship
5
Corporation
 Advantages:




Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
 Disadvantages:
 Double taxation
 Cost of set-up and report filing
6
Finance in the Organizational
Structure of the Firm
Board of Directors
President
Vice-President:
Sales
Vice-President:
Operations
Treasurer
Credit
Manager
Inventory
Manager
Director of
Capital
Budgeting
Vice-President:
Finance
Vice-President:
Information Systems
Controller
Cost
Financial
Tax
Accounting Accounting Department7
The Financial Manager’s
Responsibilities
 Forecasting and planning
 Major investment and financing decisions
 Coordination and control
 Dealing with financial markets
8
Goals of the Corporation
 Primary goal: stockholder wealth maximization
maximizing stock price
 Managerial incentives
 Social responsibility
 SP max. and social welfare: Requires
 efficient low-cost plant  high quality goods
 produce goods needed by people  new: tech, goods, jobs
 efficient services, well-located businesses, etc…
9
Managerial Actions to
Maximize Stockholder Wealth
 Capital Structure Decisions
 Capital Budgeting Decisions
 Dividend Policy Decisions
10
Factors Influenced by Managers that
Affect Stock Price
 Projected earnings per share
 Timing of earnings streams
 Riskiness of projected earnings
 Use of debt (capital structure)
 Dividend policy
11
Agency Relationships
 An agency relationship exists whenever a
principal hires an agent to act on their behalf.
 Within corporations, agency relationships exist
between:
 Stockholders and managers, and
 Stockholders and creditors.
12
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
13
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.
14
Summary of Major Factors Affecting Stock Prices
External
Constraints:
Level of
Economic
Activity and
Corporate Taxes
2. Environmental
Regulations
Strategic Policy
Decisions
Controlled by
Management
3. Product and
Workplace Safety
Regulations
1. Types of products
and services
produced
4. Employment
Practices Rules
2. Production
methods used
Timing of Cash
Flows
5. Federal Reserve
Policy
3. Relative use of
debt financing
Degrees of Risk
6. International
Developments
4. Dividend policy
1. Antitrust Laws
Stock
Market
Conditions
Expected
Profitability
Stock
Price
15