An Overview of Financial Management

What causes a company to have a particular stock value?
How can managers make choices that add value to their companies?
How can managers ensure that their companies don’t run out of cash while executing their plans?

Institutions and capital markets
Investments
Financial management

Sole proprietorship
Partnership
Corporation

Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Limited life
Unlimited liability
Difficult to raise capital

A partnership has roughly the same advantages and disadvantages as a sole proprietorship.

Advantages:
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital


Disadvantages:
Double taxation
Cost of set-up and report filing

The primary goal is 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

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


Amount of cash flows expected by shareholders
Timing of the cash flow stream
Risk of the cash flows

Sales
Current level
Short-term growth rate in sales
Long-term sustainable growth rate in sales
Operating expenses
Capital expenses
Factors that Affect the Level and Risk of Cash Flows
Decisions made by financial managers:
Investment decisions (product lines, production processes, geographic market, use of technology, marketing strategy)
Financing decisions (choice of debt policy and dividend policy)
The external environment

Use of computers and electronic transfers of information
The globalization of business

An agency relationship exists whenever a principal hires an agent to act on his or her behalf.
Within a corporation, agency relationships exist between:
Shareholders and managers
Shareholders and creditors

Managers are naturally inclined to act in their own best interests.
But the following factors affect managerial behaviour:
Managerial compensation plans
Direct intervention by shareholders
The threat of firing
The threat of takeover

Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors.
In the long run, such actions will raise the cost of debt and ultimately lower stock price.