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Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 1by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-1
Type of Business andType of Business and
The Role of Financial The Role of Financial
ManagementManagement
Type of Business andType of Business and
The Role of Financial The Role of Financial
ManagementManagement
1-2
Organizing a BusinessOrganizing a Business
Types of Business Organizations
Sole Proprietorships
Partnerships
Corporations
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 2by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-3
Sole
Proprietorship
Partnership Corporation
Who owns the
business?
The manager
Partners Shareholders
Are managers
and owners
separate?
No No Usually
What is the
owner’s
liability?
Unlimited Unlimited Limited
Are the owner
& business
taxed
separately?
No No Yes
Organizing a BusinessOrganizing a Business
1-4
Corporate StructureCorporate Structure
Sole Proprietorships
Corporations
Partnerships
Limited Liability
Corporate tax on profits
+
Personal tax on
dividends
Unlimited Liability
Personal tax on profits
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 3by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-5
What is the Goal What is the Goal
of the Firm?of the Firm?
Maximization of Maximization of
Shareholder Wealth!Shareholder Wealth!
Value creation occurs when
we maximize the share price
for current shareholders.
1-6
Financial
Manager
Firm's
operations Investors
(1) Cash raised from investors
(1)
(2) Cash invested in firm
(2)
(3) Cash generated by operations
(3)
(4a) Cash reinvested
(4a)
(4b) Cash returned to investors
(4b)
The Role of The Financial ManagerThe Role of The Financial Manager
Real
assets
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 4by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-7
Investment DecisionsInvestment Decisions
What is the optimal firm size?
What specific assets should be
acquired?
What assets (if any) should be
reduced or eliminated?
Most important of the three Most important of the three
decisions.decisions.
1-8
Financing DecisionsFinancing Decisions
What is the best type of financing?
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 Determine how the assets (LHS of
balance sheet) will be financed (RHS balance sheet) will be financed (RHS
of balance sheet).of balance sheet).
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 5by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-9
Asset Management Asset Management
DecisionsDecisions
How do we manage existing assets
efficiently?
Financial Manager has varying degrees
of operating responsibility over assets.
Greater emphasis on current asset
management than fixed asset
management.
1-10
Goals of The CorporationGoals of The Corporation
Shareholders desire wealth maximization
Do managers maximize shareholder
wealth?
Mangers have many constituencies
“stakeholders”
“Agency Problems” represent the conflict
of interest between management and
owners
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 6by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-11
Role of ManagementRole of Management
An agentagent is an individual
authorized by another person,
called the principal, to act in
the latter’s behalf.
Management acts as an agentagent
for the owners (shareholders)
of the firm.
1-12
Agency TheoryAgency Theory
Agency TheoryAgency 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 theoryagency theory.
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 7by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-13
Agency TheoryAgency Theory
Incentives include stock optionsstock options,,
perquisitesperquisites,, and bonusesbonuses.
Principals must provide incentivesincentives
so that management acts in the
principals’ best interests and then
monitormonitor results.
1-14
Company and Financial Company and Financial
EnvironmentEnvironment
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 8by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-15Irwin/McGraw-Hill
Financial MarketsFinancial Markets
Company
Issue Debt
CashInvestors
1-16Irwin/McGraw-Hill
Financial MarketsFinancial Markets
Funds
Funds
Banks
Insurance Cos.
Brokerage Firms
Obligation
s
Depositors
Policyholders
Investors
Obligation
s
Company
Intermediary
Investor
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 9by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-17Irwin/McGraw-Hill
Financial MarketsFinancial Markets
Banks
Depositors
$2.5 mil
Cash
Loan
Deposits
Company
Intermediary
Investor
1-18
Financial Public Relations
and Investor Relations
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 10by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-19
WHAT IS PR ?
PR Involves a Variety of Programmes
Designed to Promote or Protect a
Company,s Image or its Products
1-20
Evaluate public Attitudes
Identifies issues of Identifies issues of public concern
programs to gain public acceptance
Executes programs to gain public acceptance
The Role of The Role of
Public RelationsPublic Relations
Van Horne & Wachowicz,
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Chapter 1: The Role of Financial Management
I - 11by Gregory A. Kuhlemeyer, Ph.D.,
Carroll College, Waukesha, WI
1-21
Functions of Public RelationsFunctions of Public Relations
Press Relations Press Relations
Product PublicityProduct PublicityProduct PublicityProduct Publicity
Corporate CommunicationCorporate CommunicationCorporate CommunicationCorporate Communication
Public AffairsPublic AffairsPublic AffairsPublic Affairs
LobbyingLobbyingLobbyingLobbying
Employee and Investor RelationsEmployee and Investor RelationsEmployee and Investor RelationsEmployee and Investor Relations
Crisis ManagementCrisis ManagementCrisis ManagementCrisis Management
1-22