AN OVERVIEW OF MANAGERIAL

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• CHAPTER 1
• AN OVERVIEW OF MANAGERIAL
• FINANCE

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• What is Finance?
• Finance is the Science and Art of Managing Money
• Finance Deals with Decisions about How to
• Raise Money
• Invest Money
• Spend Money

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• Finance is important For every body
• (How)
• When you want to
• borrow to buy a car or a house
• retire ( the amount of payment you receive)
• start your own business
• invest your money

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• Finance and other disciplines
• Finance is closely related to
• Management
• Marketing
• Information Systems
• Accounting
• Economics

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• Finance Accounting
• Differences between Finance Accounting
• Accounting Finance
• Gathering Presenting Decision
  Making
• Accounting Information
• Accrual Concept Cash Concept

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• On December 20, 2006, Gulf Co. generated sales of
  1,000,000 on credit to be paid after 30 days (
  Jan , 19, 2007).
• Dec,20,2006
• Account Receivables 1,000,000
• Sales 1,000,000
• January 19,2007
• Cash 1,000,000
• Account Receivables ,1000,000

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• Finance consists of three interrelated areas
• Financial Markets and Institutions
• Investments
• Managerial Finance) Role of Finance within a
  Business Organization (

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• Forms of Business Organizations
• (Proprietorship, Partnership, Corporation)
• Proprietorship
• A business owned by one Individual.
• Partnership
• A business owned by two or more than two
  persons.

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• Corporation
• A corporation is a legal entity created
• By law.
• it is separate and distinct from its owners
  and managers.
• Money contributed to start a corporation is
  called capital stock and is divided into shares.
• The owners of the corporation are called
  stockholders or shareholders.

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• Corporation enjoys four major advantages
• 1. Limited Liability
• 2. Permanency
• 3. Liquidity
• 4. Ability to Raise Capital

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• Role of Finance in a typical Business
• Organization

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Stockholders
BOD
President (CEO)
VP-Marketing
VP- Finance
VP-Production
Treasurer
Controller
Accounting Functions
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Treasurer
Capital Budgeting
Managing Cash Marketable Securities
Managing Risk
Capital Structure
Managing Inventory
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• Responsibilities Functions of the Financial
  manager

Forecasting Planning
Investment Financing Decisions
Coordination Control
Dealing with Financial Markets
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• The goals of the Corporation
• The management primary goal is
• stockholder wealth maximization
• This is translated into maximizing the value of
  the firm as measured by the price of the
  firms common stock.

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• The Goals of the Corporation

Stockholder Wealth Maximization
Stock Price Maximization
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• Social Responsibility
• The concept that businesses should be
• Actively concerned with the welfare
  of society at large.
• Businesses are responsible for the welfare of
  their employees, customers, and the
  communities in which They operate?

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• Stock Price Maximization and Social
• Welfare
• Actions that maximize stock prices are
• consistent with social welfare. STPM requires
• Company to produce high quality goods and
  services at the lowest possible cost.
• The development of products that consumers
  want and need.
• Requires efficient and courteous services,
  adequate stocks of merchandise and good
  location.

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• Wealth maximization (Value)
• Management must consider the following
• factors in its attempt to maximize wealth
• Projected earnings per Share (EPS)
• rather than profit maximization,
• Timing of the earnings stream,
• Riskiness of the projected earnings,

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• Management must consider the following
• factors in its attempt to maximize wealth
• Projected earnings per Share (EPS)
• rather than profit maximization,
• b. Timing of the earnings stream,
• c. Riskiness of the projected earnings,

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• Gulf Star reported net income of 200,000
  
• for 2005. Gulf has 100,000 shares
  outstanding.
• You own 100 shares. So your share of the
• earnings is 200.
• During 2006, the company issued 25,000 more
• shares and reported net income of 220,000.
  The
• earnings per share is
• 220,000/125,000 1.76/share.
• Your share of the earnings is 1.76x100 176

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• Timing of the earnings stream
• ( increase in profits Million)
• YEAR1 YEAR2 TOTAL
• Project A 5 2 7
• Project B 2 5 7

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• Riskiness of the projected earnings
• Project A- very safe project and is expected
• to raise earnings by 1.0 per share.
• Project B - very risky project and is expected
• to raise earnings by 2.00 per share.

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• Agency Relationship
• Agency relationship exists when one or more
• people ( the principals) hire another person
• (the agent) to perform a service and then
• Delegate decision-making authority to that
• agent.
• Agency Relationships Exist
• between
• Stockholders and managers and
• Stockholders and creditors

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• Stockholders versus Managers
• Agency relationship that exist between
• stockholders and mangers gives rise to
• what so called agency problem.
• Agency problem the likelihood that
  mangers place personal goals ahead of corporate
  goals.

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• Mechanisms available to make mangers to
• act in the shareholders Best interest?
• 1. Structuring Managerial Incentives
• . Performance shares
• . Executive stock option
• 2. Shareholder intervention (The threat of
  firing)
• 3. The threat of takeover

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• Stockholders versus Creditors
• Conflicts between stockholders and
• Creditors result from
• Actions taken by stockholders that
  jeopardize the interest of the creditors

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• Creditors lend funds to the firm at
• rates that are based on the following
• factors
• The riskiness of the firms existing assets
• The riskiness of future asset additions
• Firms existing capital structure
• Future capital structure

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• The goal of wealth maximization requires fair
  play with creditors
• Stockholder wealth depends on continued
  access to capital market and abiding by both the
  letter and the sprit of credit agreements.
• Managers as agents of both the creditors and
  the stockholders, must act in a manner that is
  fairly balanced between the interests of these
  two parties

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• Stakeholders
• Individuals or entities that have an interest in
• the well-being of a firm, including
• a. Stockholders, b. Creditors, c. Employees
• d. Customers and ,e. Suppliers
• Maximizing shareholder wealth requires the fair
  treatment of all stakeholders