Lecture 1-2 CF UMT Spring 2020
Lecture 1-2 CF UMT Spring 2020
Lecture 1-2 CF UMT Spring 2020
FINANCE
LEARNING GOALS
The basic types of financial management decisions and
the role of the financial manager.
The goal of financial management
The financial implications of the different forms of
business organization
The conflicts of interest that can arise between
managers and owners
The difference between accounting value (or “book”
value) and market value.
The difference between accounting income and cash
flow
How to determine a firm’s cash fl ow from its financial
statements.
WHAT IS CORPORATE
FINANCE
To start your own business, you need to address
following considerations:
1. Choice of long-term investments (Lines of
business, buildings, machinery, and equipment)
2. Procurement of long-term financing to pay for
your investment: Debt or Equity
3. Management of everyday financial activities
(collecting from customers and paying suppliers
Corporate finance is the study of ways to
answer these three questions
CORPORATE
STRUCTURE
FINANCIAL
MANAGEMENT
DECISION MAKING
Capital Budgeting
The process of planning and managing a firm’s
long-term investments
Financial manager tries to identify profitable
investment opportunities
The types of investment opportunities depend
upon the nature of the firm’s business
Size, Risk and Timing of Cash Flows are important
considerations
FINANCIAL
MANAGEMENT
DECISION MAKING
Capital Structure
Optimal mixture of long-term debt and equity
Heart of the capital structure issue: Which capital structure
is better for a particular firm
1. How much should the firm borrow: it affects both the risk
and the value of the firm
2. What are the least expensive sources of funds for the firm
How and where to raise the money
1. Equity (Assessment of the expenses associated with
raising long-term financing)
2. Debt (Choosing among lenders and among loan types)
FINANCIAL
MANAGEMENT
DECISION MAKING
Working Capital Management
Firm’s short-term assets (Receivables, Inventory, Payables etc.)
Involves a number of activities related to the firm’s receipt and
disbursement of cash
The goal is to ensures that the firm has sufficient resources to
continue its operations and avoid costly interruptions
1. How much cash and inventory should we keep on hand?
2. Should we sell on credit? What terms will we offer, and to whom
will we extend them?
3. How will we obtain any needed short-term financing? Will we
purchase on credit, or will we borrow in the short term and pay
cash?
4. If we borrow in the short term, how and where should we do it?
POSSIBLE FINANCIAL
GOALS
Survive
Avoid financial distress and bankruptcy
Beat the competition
Maximize sales or market share
Minimize costs
Maximize profits
Maintain steady earnings growth
POSSIBLE FINANCIAL
GOALS
Are these actions are in the stockholders’
best interests: -
Increase market share or unit sales by lowering
our prices or relax our credit terms
We can always cut costs simply by doing away
with things such as research and development
We can avoid bankruptcy by never borrowing any
money or never taking any risks
Profi t maximization in a given year by deferring
maintenance, letting inventories run down, and
taking other short-run cost-cutting measures
THE GOAL OF FINANCIAL
MANAGEMENT