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Lecture Intermediate corporate finance – Chapter 1: An overview of financial management

Chapter 1 - An overview of financial management. The following topics will be discussed in this chapter: Basic goal to create shareholder value, agency relationships, transparency in financial reporting, the cost of money. | Chapter 1 An Overview of Financial Management 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 1 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. 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. 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 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 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) 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. What is the weighted average cost of . | Chapter 1 An Overview of Financial Management 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 1 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. 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. Is maximizing stock price good for society, employees, and customers? Employment growth is higher in firms that try to maximize stock price. On