W1: Intro What’s Fin? Det. value n make decisions based on that value assessment. Fin fn allocates resources, incl. acquiring, investing, & managing resources. Areas: investmt, fin mkt/int, corp fin. Fin manager’s role : top fin manager - Chief Fin Officer (CFO). Treasurer: oversee cash/credit mgmt., capital expdt, fin planning. Controller: oversee tax, cost/fin accounting, data processing Basic types of fin. Mgmt. decisions 1.capital budgeting– what LT investment to make? 2.capital structure– How to pay for assets? mix of LT debts & equity firm uses to finance operations (acquiring); DE ratio affects capital structure 3. working capital mgmt – ref firm’s ST assets & ST liabilities & firm’s daily fin. activities (managing); use ↑ / ↓ inv will affect risk. Fin. Implications of Diff Biz Org forms 1.Corp (Y) ownershp transfer easy; unlimited corp life; limited L (gd for raising cash) (N) must pay tax; $ paid to SH as dividend tax again as Y to those SH (double taxn) 2.SP (Y) easy to start, least regulated, single ownr keep profit, taxed 1ce as own Y (N) limitd 2 ownr life, equity capital limitd 2 ownr wealth, diff to sell ownershp int, L unlim. 3.Pship (Y) more capital, easy 2 start, income taxed 1ce as personal Y (N) unlimited liab, pship dissolve when 1 ptnr die/wish to sell, diff to transfer ownersp Fin Mgmt Goal max SH value/stock px (current value per share) Stock px affected by 1) amt of cash flow SH expect 2) timing of CF stream 3) Riskiness of CF stream. All 3 det stock’s intrinsic value , the est. of a stock’s true value based on accurate risk & return data. Market px : based on perceived info seen by marginal investor Agency Problem: conflict of interest btwn principal/agent - SH (principal) hire managers (agent) via BOD to run company. Conflicts btwn 1) SH & manager 2) SH & creditor. Agency costs (costs that arise cos of the problem) - Direct : expenditures benefit mgmt. but cost (luxurious accom, high pay) + monitoring costs (auditors, corp governance) Indirect : loss opp. which wld ↑ LR firm value if accepted. Eg. Decisions take up time, maybe first mover advantage Solutions? (1) Compensation plans tied to SH value (2) Direct SH intervention (3) Threat of firing/ takeover/better performers promoted (4) Imptance of corp governance! Operate ethically. (5) Don’t be both CEO & chairman (BOD & mgmt shdnt clash) (6) Managers given option to buy stock at bargain px. Stock worth ↑,value option worth↑ Types of Fin. Mkts (intermediary btwn savr/borrowr, mkt whr fin. instruments traded) Money mkt : debt securities <1y r traded: commercial paper, inter-bank loans, T-bills, treasury securities (STdebt). Loosely connected dealer mkt (no 3 rd party), banks major players. Capital mkt: equity & LT-term debt claims traded. usually auction mkts: Sg Exchange, IPO Primary Mkt (get directly frm company). 2 types: public (sell securities to public. needs underwriting, more regulatory req, more costly) & private offering (negotiated securities sale to large fin institutn/wealthy indivs, less costly) Ref to original sale of new securities by gov & corps. Corp sells
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