Bài giảng Management theory and practice Financial: Chapter 1

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Nội dung Text: Bài giảng Management theory and practice Financial: Chapter 1

PowerPoint Presentation prepared by Traven Reed Canadore College
Chapter 1 An Overview of Financial Management and the Financial Environment
Topics in Chapter CH1 • Attributes of successful companies • Forms of business organization • Objective of the firm: maximize wealth • Determinants of fundamental value • Financial securities, financial institutions, and financial markets Copyright © 2011 by Nelson Education Ltd. 1-3
Attributes of Successful Companies CH1 • Like a stool needs all three legs to stand, a successful business relies on: – Skilled people – Strong external relationship – Sufficient capital Copyright © 2011 by Nelson Education Ltd. 1-4
The Corporate Life Cycle CH1 • No two companies will develop in exactly the same way • A business usually begins as a small potato and hopefully finishes up as a major giant • Structures of business organizations: – Sole proprietorship – Partnership – Corporation – Income trust Copyright © 2011 by Nelson Education Ltd. 1-5
Starting as a Proprietorship CH1 • Advantages: – Ease of formation – Subject to few regulations – No corporate income taxes • Disadvantages: – Difficult to raise capital to support growth – Unlimited liability – Limited life span Copyright © 2011 by Nelson Education Ltd. 1-6
Starting as or Growing into a Partnership CH1 • A partnership involves two or more entities with various privileges and responsibilities – General vs. limited partner – Limited liability partnership • A partnership has roughly the same advantages and disadvantages as a sole proprietorship. Copyright © 2011 by Nelson Education Ltd. 1-7
Becoming a Corporation CH1 • A corporation is a legal entity separate from its owners and managers. • File papers and prepare reports with Corporation Canada. – Articles of incorporation – Bylaws Copyright © 2011 by Nelson Education Ltd. 1-8
Advantages and Disadvantages of a Corporation CH1 • Advantages: – Unlimited life – Easy transfer of ownership – Limited liability – Ease of raising capital • Disadvantages: – Double taxation – Higher setup cost – Endless report filing Copyright © 2011 by Nelson Education Ltd. 1-9
A Unique Twist: Income Trusts CH1 • Expand 100 times to a market capitalization of $192 billion from 1994 to 2007 • Growth ends as government has announced plans in 2006 to tax trusts at the same rate as corporations • In the past, income trust cash distributions are only taxed in the hands of investors, not at the firm level • Investors see trusts as tax-efficient and are willing to pay more for a company converted to a trust Copyright © 2011 by Nelson Education Ltd. 1-
What should be management’s primary objective? CH1 • The primary objective should be shareholder wealth maximization, which translates to maximizing the fundamental share price, not just the current market price. • Should firms behave ethically? YES! • Business ethics are a company’s attitude and conduct toward its employees, customers, community and shareholders Copyright © 2011 by Nelson Education Ltd. 1-
Stock Price Maximization and CH1 Social Welfare • Do firms have any responsibilities to society at large? Yes! • Unethical behavior destroys public trust and confidence. • Maximizing share price is good for society. Why? • Shareholders are also members of society. Copyright © 2011 by Nelson Education Ltd. 1-
Is Maximizing stock price CH1 good for consumers? • Consumer welfare is higher in capitalist free market economies than in communist or socialist economies due to competition • Consumers can improve quality of life by the direct or the indirect investments in the stock market Copyright © 2011 by Nelson Education Ltd. 1-
Is maximizing stock price good for employees? CH1 • Employment growth is higher in firms that try to maximize stock price. On average, employment goes up in: – firms that make managers into owners (such as LBO firms) – firms that were owned by the government but that have been sold to private investors Copyright © 2011 by Nelson Education Ltd. 1-
How do managers affect shareholder wealth? CH1 • Improve a firm’s ability to generate cash flows now and in the future by focusing on: – 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) Copyright © 2011 by Nelson Education Ltd. 1-
Free Cash Flows (FCF) CH1 • There are many ways firms can increase free cash flows • FCF are cash flows available (or free) for distribution to all investors (stockholders and creditors). • FCF = sales revenues - operating costs - operating taxes - required investments in operating capital. Copyright © 2011 by Nelson Education Ltd. 1-
What is the weighted average cost of capital (WACC)? CH1 • WACC is the average rate of return required by all of the company’s investors. • WACC is affected by: – Capital structure (the firm’s relative amounts of debt and equity) – Interest rates – Risk of the firm – Investors’ overall attitude toward risk Copyright © 2011 by Nelson Education Ltd. 1-
Determinants of a Firm’s Value CH1 Copyright © 2011 by Nelson Education Ltd. 1-
Who are the providers (savers) and users (borrowers) of capital? CH1 • Households: Net savers • Non-financial corporations: Net users (borrowers) • Governments: Net borrowers • Financial corporations: Slightly net borrowers, but almost breakeven Copyright © 2011 by Nelson Education Ltd. 1-
Capital Allocation Process CH1 Copyright © 2011 by Nelson Education Ltd. 1-