Chapter 1 Powerpoint - Chapter1 AnOverviewofFinancial...

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1 Chapter 1 An Overview of Financial  Management
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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
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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.
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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.
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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
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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)
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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.
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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.)
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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)
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This note was uploaded on 10/23/2009 for the course MGMT 340 taught by Professor Clarkson during the Spring '09 term at Indiana Institute of Technology.

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Chapter 1 Powerpoint - Chapter1 AnOverviewofFinancial...

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