Title: Career opportunities
1Lecture One An Overview of Financial Management
- Career opportunities
- Issues of the early 2000
- Forms of business organization
- Goals of the corporation
- Agency relationships
2Career Opportunities in Finance
- Money and capital markets
- Investments
- Financial management
3Financial ManagementIssues of Early 2000
- Communication Systems Development Use of
computers, electronic transfers of information
and cellular communication - The globalization of business
4Responsibilities of the Financial Staff
- Forecasting and planning
- Investment and financing decisions
- Coordination and control
- Transactions in the financial markets
5Alternative Forms of Business Organization
- Sole proprietorship
- Partnership
- Corporation
6Sole Proprietorship
- Advantages
- Ease of formation
- Subject to few regulations
- No corporate income taxes
- Disadvantages
- Limited life
- Unlimited liability
- Difficult to raise capital
7Partnership
- A partnership has roughly the same advantages and
disadvantages as a sole proprietorship.
8Corporation
- Advantages
- Unlimited life
- Easy transfer of ownership
- Limited liability
- Ease of raising capital
- Disadvantages
- Double taxation
- Cost of set-up and report filing
9(No Transcript)
10The Responsibilities of the Financial Manager
- Invest Funds
- In Real Assets
- In Financial Assets
- Manage the Assets Acquired
- Distribute the Proceeds
- Raise Funds
- From Financial Institutions
- From the Savers Directly
.
11Goals of the Corporation
- The primary goal is shareholder wealth
maximization, which translates to maximizing
stock price. - Do firms have any responsibilities to society at
large? - Is stock price maximization good or bad for
society? - Should firms behave ethically?
12Factors that Affect Stock Price
- Projected cash flows to shareholders
- Timing of the cash flow stream
- Riskiness of the cash flows
13Factors that Affect the Level and Riskiness of
Cash Flows
- Decisions made by financial managers
- Investment decisions
- Financing decisions (the relative use of debt
financing) - Dividend policy decisions
- The external environment
14Agency Relationship and Ethical Issues in
Finance Goals of the Corporation
- The primary goal is shareholder wealth
maximization, which translates to maximizing
stock price. - Do firms have any responsibilities to society at
large? - Is stock price maximization good or bad for
society? - Should firms behave ethically?
15Agency Relationships
- An agency relationship exists whenever a
principal hires an agent to act on their behalf. - Within a corporation, agency relationships exist
between - Shareholders and managers
- Shareholders and creditors
16Shareholders versus Managers
- Managers are naturally inclined to act in their
own best interests. - But the following factors affect managerial
behavior - Managerial compensation plans
- Direct intervention by shareholders
- The threat of firing
- The threat of takeover
17Shareh olders versus Creditors
- 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.
18Fiduciary Duty
The duty of the finest loyalty--Supreme Court
Justice Benjamin Cardozo, 1928. The fiduciary
relationship is one founded on trust or
confidence reposed by one person in the
integrity, fidelity and honor of another.
19Obligations of a Fiduciary
1. an affirmative duty to disclose to the
principal any and all information I his or her
possession that bears upon any decision the
principal is about to make. 2. a special duty of
care in the exercise of any and all delegated
authority, the said duty being generally defined
as the degree of care, skill, and diligence which
an ordinary prudent person would exercise in the
management of ones own affairs. 3. see next
slide...
203. a specific obligation to avoid taking any
personal advantage from ones position,
especially (though not only) when to do so would
result in any detriment whatsoever to the
principal. The only exception to this
obligation would be specific authority spelled
out in the legal contract. This obligation is
sometimes referred to as the fiduciary ban
on self-dealing, or appropriating corporate
opportunities to oneself. This would include
insider trading.
213. a specific obligation to avoid taking any
personal advantage from ones position,
especially (though not only) when to do so would
result in any detriment whatsoever to the
principal. The only exception to this
obligation would be specific authority spelled
out in the legal contract. This obligation is
sometimes referred to as the fiduciary ban
on self-dealing, or appropriating corporate
opportunities to oneself. This would include
insider trading.
22THE COMPOSITION OF US LAW
STATUTORY LAW
COMMON LAW
SEC, FED, etc.
Business Judgement Rule
Fiduciary
Prudential
Paramount Communication, Inc. v. Time, Inc.
The Supreme Court and other courts 1. Interpret
the U.S. Constitution 2. Interpret Statutory
Law 3. Apply Common Law when necessary Statutory
Law Set forth by US Congress and State
Legislatures. US Constitution is the foremost
example. Common Law Law based upon rules
deduced (mainly by judges) over time from the
basic customs and institutions of the people and
related to their socio/political/economic
condition.
23Major Factors affecting Stock Price
External Constraints 1. Antitrust Laws 2.
Environmental Regulations 3. Product and
Work-Place Safety Regulations 4. Employment
Practices Rules 5. And So Forth 6. A Democratic
Society 7. A Healthy Capitalist System for which
TRUST is a necessary condition 8. Agency Problem
- ETHICAL
Stock Market Conditions
Level of Economic Activity and Corporate Taxes
Strategic Policy Decisions Controlled by
Management 1. Types of Products or Services
Produced 2. Production Methods Used 3. Relative
Use of Debt Financing (4) 4.
Dividend Policy (5) 5. And So Forth
Expected (1) Profitability (EPS)
Stock Market
Timing of Cash Flows (3)
Degree of Risk (2)