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Financial Management

Prepared By

Yousef EL-mudallal

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CHAPTER 1Overview of Financial Management

and its environment Financial management

Definition of Financial management.

Forms of business organization.

Objective of the firm: Maximize wealth.

Function of Finance Manager.

Importance of Financial management.

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Definition of Financial management

“The function that deals with procurement of funds and their effective utilization in the business”.

Financial Management is mainly concerned with the effective funds management in the business.

In simple words, Financial Management as practiced by business firms can be called as Corporation Finance or Business Finance.

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Why is corporate finance important to all managers?

Corporate finance provides the skills managers need to:

Identify and select the corporate strategies and individual projects that add value to their firm.

Forecast the funding requirements of their company, and devise strategies for acquiring those funds.

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Sole proprietorship

Partnership

Corporation

What are some forms of business organization a company might have as

it evolves from a start-up to a major corporation?

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which is n business owned by one individual.

Advantages:

Ease and inexpensively of formation.

Subject to few regulations.

No corporate income taxes but is taxed only as a part of the proprietor’s personal income.

Sole Proprietorship

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Sole Proprietorship

Disadvantages:

Limited life (the life of a proprietorship is limited to the life of its founder).

Unlimited liability.

Difficult to raise capital to support growth.

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A partnership exists whenever two or more persons associate to conduct a noncorporate business for profit.

A partnership has roughly the same advantages and disadvantages as a sole proprietorship.

Partnership

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Advantages:

Ease and inexpensively of formation

Subject to few regulations

No corporate income taxes but is taxed only as a part of the proprietor’s personal income.

Partnership

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Disadvantages:

Limited life (the life of a Partnership is limited to the life of its founders).

Unlimited liability (each partner is liable for the business’s debts).

Difficult to raise large amounts of capital.

Difficulty transferring ownership.

Partnership

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Corporation

A corporation is a legal entity separate and distinct from its owners and managers.

File papers of incorporation with state.

Charter

Bylaws

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Corporation

The charter includes the following information:

name of the proposed corporation, types of activities it will pursue, amount of capital stock, Number of directors,

names and addresses of directors.

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Corporation

The bylaws are a set of rules drawn up by the founders of the corporation. Included are such points as

how directors are to be elected (all elected each year, or perhaps one-third each year for 3-year terms);

whether the existing stockholders will have the first right to buy any new shares the firm issues;

procedures for changing the bylaws themselves, should conditions require it.

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Advantages:

Unlimited life

Easy transfer of ownership

Limited liability

Ease of raising capital Disadvantages:

Double taxation

Cost of set-up and report filing

Advantages and Disadvantages of a Corporation

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Public Corporation

Initial Public Offering (IPO) of Stock

Raises cash

Allows founders and pre-IPO investors to “harvest” some of their wealth

Subsequent issues of debt and equity

Agency problem: managers may act in their own interests and not on behalf of owners (stockholders).

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• Profit maximization• It ignores the time value of money• It ignores the cash flows• It ignores risk

1. Profit maximization2. Wealth maximization

Objective of the firm

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The primary objective should be shareholder wealth maximization, which translates to maximizing stock price.

Should firms behave ethically? YES!

Do firms have any responsibilities to society at large? YES! Shareholders are also members of society.

What should management’s primary objective be?

Objective of the firm: Maximize wealth

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Is maximizing stock price good for society, employees, and customers?

Aside from such illegal actions as attempting to form monopolies, violating safety codes, and failing to meet pollution requirements, the same actions that maximize stock prices also benefit society. Here are some of the reasons:

To a large extent, the owners of stock are society.

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Employment growth is higher in firms that try to maximize stock price. On average, employment goes up in:

firms that make managers into owners .

firms that were owned by the government but that have been sold to private investors .

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Consumer welfare is higher if firms try to maximize stock price.

Fortune lists the most admired firms. In addition to high stock returns, these firms have:

high quality from customers’ view

employees who like working there

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Amount of expected cash flows (bigger is better)

Timing of the cash flow stream (sooner is better)

Risk of the cash flows (less risk is better)

What three aspects of cash flows affect an investment’s value?

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FUNCTIONS OF FINANCE MANAGER

Forecasting Financial requirementsHe should estimate, how much finances required to acquire fixed assets and forecast the amount needed to meet the working capital requirements in future.

Acquiring Necessary Capital

After deciding the financial requirement, the finance manager should concentrate how the finance is mobilized and where it will be available. It is also highly critical in nature.

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FUNCTIONS OF FINANCE MANAGER

Investment DecisionThe finance manager must concentrate to principles of safety, liquidity and profitability while investing capital.

Cash Managementproper cash management is not only essential for effective utilization of cash but it also helps to meet the short-term liquidity position of the concern.

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Importance of Financial management.

Finance is the lifeblood of business organization.

Financial Planning.

Acquisition of Funds.

Proper Use of Funds.

Financial Decision.

Increase the Value of the Firm.

Promoting Savings.

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Home work

1. Discuss the objectives of financial management

2. Discuss the role of financial manager.

3. What are the alternative forms of business organization?

4. What are their advantages and disadvantages?

To prepare : Time value of money