1 / 23

Colorado University of Commerce

Colorado University of Commerce. Bachelor of Business (Event management / Hospitality & Tourism) Financial Management Chapter 1 - Introduction. Introduction to Financial Management. Definitions of Finance Financial Management Decisions and The Goal Forms of Business Organizations

aman
Download Presentation

Colorado University of Commerce

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Colorado University of Commerce Bachelor of Business (Event management / Hospitality & Tourism) Financial Management Chapter 1 - Introduction

  2. Introduction to Financial Management • Definitions of Finance • Financial Management Decisions and The Goal • Forms of Business Organizations • The Corporation and Financial Markets • Ten Principles of Finance

  3. Definition of Finance • Finance is the study of how people allocate scarce resources over time. Two characteristics of financial decisions; • Costs and benefits of financial decisions are spread out over time • Costs and benefits are not known in advance • Finance consists of concepts to help you organize your decision making process and quantitative models to help you evaluate alternatives

  4. Financial Management Decisions and The Goal • Capital Budgeting: What assets should be acquired? • Capital Structure: What is the best way of financing the assets? • Working Capital Management: Short-term asset and liability management

  5. Financial Management Decisions and The Goal (Continued) • The Goal of Financial Managers • Maximize profits • How to define profits • Risks associated with maximizing profits are ignored • Profits of this year or the next should be maximized? • Maximize the market value of the existing owners’ equity

  6. Forms of Business Organization

  7. The Corporation and Financial Markets Cash Corporation Cash Flows: Reinvested or Investors Secondary Market Securities Dividends, Interest etc. Tax Government

  8. The Corporation and Financial Markets (Continued) • Primary Market • Market in which new issues of a security are sold to initial buyers • Secondary Market • Market in which previously issued securities are traded • Initial Public Offering (IPO) • The first time the firm’s stock is sold to the general public

  9. Ten Principles of Financial Management • Risk-Return Tradeoff • Save and invest for future consumption • Investments should provide appropriate compensation for forgone consumption

  10. StandardDeviation AverageReturn Series Distribution Large-companystocks 13.3% 20.1 Small-companystocks 17.6 33.6 Long-termcorporate bonds 5.9 8.7 Long-termgovernment 5.5 9.3 Intermediate-termgovernment 5.4 5.8 U.S. Treasurybills 3.8 3.2 Inflation 3.2 4.5 -90% 90% 0% Ten Principles of Financial Management (Continued)

  11. Ten Principles of Financial Management (Continued) • The Time Value of Money • A dollar received today is more valuable than a dollar received in the future because of opportunity cost • Costs and future benefits of investments should be measured in present values • If present value of future benefits exceed costs, then investment should be made (Net Present Value (NPV)>0)

  12. Ten Principles of Financial Management (Continued) • Cash is King • Cash flows not accounting profits are important • Cash flows received can be reinvested by the firm • Accounting problems-depreciation and matching of costs and expenses • Incremental Cash Flows that Matter • Incremental cash flows are direct consequence of taking a specific course of action

  13. Ten Principles of Financial Management (Continued) • Competitive Markets • Project evaluation vs. value creation-investing for returns above same risk alternatives • It is not easy to find projects that create wealth-competition • Perfect market conditions: No entry and exit restrictions, No one producer or buyer large enough to affect prices, Identical products are manufactured, Production costs are identical, Everyone is informed about everything

  14. Ten Principles of Financial Management (Continued) • If markets are perfect then it is not possible to create wealth • How can we make markets less competitive? • Product Differentiation based on features, quality, image, service and distribution • Cost Advantage through economies of scale, technology, corporate culture and input supply control

  15. Ten Principles of Financial Management (Continued) • Efficient Markets • Price adjustments to new information is quick and correct • Many profit driven investors • Information arrival is random

  16. Ten Principles of Financial Management (Continued) • “Calwest Industrial Properties, a closely held real-estate concern, has agreed to acquire Cabot Industrial Trust (CTR) for about $1.06 billion plus the assumption of $925 million in preferred stock and debt, people familiar with the matter say. Under terms of the deal, Calwest would pay $24 a share for Boston-based Cabot. The price represents a 20% premium to Cabot's price in 4 p.m. trading Friday on the New York Stock Exchange, when its shares were changing hands at $19.95, down five cents for the day.” WSJ, October 29, 2001

  17. Ten Principles of Financial Management (Continued)

  18. Ten Principles of Financial Management (Continued) • Agency Problem • Separation of ownership and management • Principal-Shareholders • Agents-Managers • Will managers work in the shareholders’ best interest? • Preference toward size over profitability • Excessive perquisites • Attitudes toward risk

  19. Ten Principles of Financial Management (Continued) • Types of agency costs • Costs of trying to get the agents to do what the principal want-monitoring costs • Lost opportunities caused by conflicts too expensive to resolve • Possible solutions • Managerial compensation • Control of the firm

  20. Ten Principles of Financial Management (Continued) • Taxes Bias Business Decisions • After-tax cash flows received can be reinvested • Favorable tax status for certain investments affects decisions • Financial leverage is affected by tax status-interest payments are tax-deductible expenses

  21. Ten Principles of Financial Management (Continued) • Diversification Eliminates Certain Type of Risk • Diversifiable/Firm Specific/Unsystematic Risk • Non-diversifiable/Market/Systematic Risk • Firm specific good news and bad news wash each other out

  22. Ten Principles of Financial Management (Continued)

  23. Ten Principles of Financial Management (Continued) • Ethical Behavior is Doing the Right Thing • Doing something that is viewed right by many people • An action that is not prohibited by law can be unethical • Unethical behavior might be costly

More Related