IFM10 Ch01 Lecture

IFM10 Ch01 Lecture - 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 The Cost of Money
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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 Is maximizing stock price good?  (Continued) Consumer welfare is higher in capitalist  free market economies than in  communist or socialist economies. Fortune  lists the most admired firms.  In  addition to high stock returns, these  firms have: high quality from customers’ view employees who like working there
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7 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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8 Free Cash Flows (FCF) Free cash flows are the cash flows that  are available (or free) for distribution to  all investors (stockholders and  creditors). FCF = sales revenues - operating costs  - operating taxes - required investments  in operating capital. 
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9 What is the weighted average  cost of capital (WACC)?   WACC is the average rate of return required  by all of the company’s investors. WACC is affected by:
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IFM10 Ch01 Lecture - Chapter1 AnOverviewofFinancial...

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