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IFM9 Ch 01 show - 1 Chapter 1 An Overview of Financial...

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Unformatted text preview: 1 Chapter 1 An Overview of Financial Management 2 Topics in Chapter Basic Goal: to create shareholder value Agency relationships: Stockholders versus managers Stockholders versus creditors Transparency in financial reporting Market interest rates 3 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. 4 What should be management’s primary objective? 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. 5 Is maximizing stock price good for society, employees, and customers? 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 6 What three aspects of cash flows affect an investment’s value? 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) 7 Free Cash Flows (FCF) Free cash flows are the cash flows that are: Available (or free) for distribution To all investors (stockholders and creditors) After paying current expenses, taxes, and making the investments necessary for growth. 8 Determinants of Free Cash Flows Sales revenues Current level Short-term growth rate in sales Long-term sustainable growth rate in sales Operating costs (raw materials, labor, etc.) and taxes Required investments in operations (buildings, machines, inventory, etc.) 9 What is the weighted average cost of capital (WACC)? The weighted average cost of capital (WACC) is the average rate of return required by all of the company’s investors (stockholders and creditors) 10...
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This note was uploaded on 04/12/2008 for the course BUS 420 taught by Professor Poindexter during the Spring '08 term at N.C. State.

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IFM9 Ch 01 show - 1 Chapter 1 An Overview of Financial...

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