Environment of Managerial Finance.ppt

1 EnvironmentofManagerialFinance J lijaBistrova EnvironmentofManagerialFinance J Bistrova10 09 2010 2 WhatisFinance Awell developedfinancialsystemisahallmarkandessentialcharacteristicofanymoderndevelopednation Financialmarkets financialintermediaries andfinancialmanagementaretheimportantcomponents Financialmarketsandfinancialintermediariesfacilitatetheflowoffundsfromborrowerstosavers Financialmanagementinvolvestheefficientuseoffinancialresourcesintheproductionofgoods EnvironmentofManagerialFinance J Bistrova10 09 2010 3 LegalFormofBusinessOrganisation SoleProprietorshipOwnedbyoneperson operatedforpersonalprofit PartnershipsOwnedbytwoormorepeople operatedforjointprofit Corporations Legalentity ownedbyindividuals operatedforjointprofit EnvironmentofManagerialFinance J Bistrova10 09 2010 4 SoleProprietorship STRENGTHS LoworganizationalcostIncometaxedonceaspersonalincomeIndependenceSecrecyEaseofdissolution WEAKNESSES UnlimitedliabilityLimitedfundingProprietormustbeallDifficulttodevelopstaffcareeropportunitiesLackofcontinuityondeathofproprietor EnvironmentofManagerialFinance J Bistrova10 09 2010 5 Partnership STRENGTHS ImprovedfundingsourcesIncreasedmanagerialtalentIncomesplitbypartnershipcontract taxedaspersonalincome WEAKNESSES UnlimitedliabilitytoallpartnersPartnershipdissolvedupondeathofpartnerDifficulttoliquidateortransferownership EnvironmentofManagerialFinance J Bistrova10 09 2010 6 Corporation STRENGTHS Owners liabilitylimitedLargecapitalizationpossible greaterfundingOwnershipreadilytransferableIndefinitelifeProfessionalmanagement WEAKNESSES HighertaxratesExpensiveorganizationGreatergovernmentregulationWhenpubliclytraded lackssecrecy EnvironmentofManagerialFinance J Bistrova10 09 2010 7 Task LiabilitycomparisonsMeridethHarperhasinvested 25 000inSouthwestDevelopmentCompany Thefirmhasrecentlydeclaredbankruptcyandhas 60 000inunpaiddebts Explainthenatureofpayments ifany byMs Harperineachofthefollowingsituations a SouthwestDevelopmentCompanyisasoleproprietorshipownedbyMs Harper b SouthwestDevelopmentCompanyisa50 50partnershipofMs HarperandChristopherBlack c SouthwestDevelopmentCompanyisacorporation EnvironmentofManagerialFinance J Bistrova10 09 2010 8 CorporateOrganizationChart EnvironmentofManagerialFinance J Bistrova10 09 2010 9 FinancialManager sKeyResponsibilities BalanceSheet CurrentAssets FixedAssets CurrentLiabilities Long TermFunds Debt Equity FinancialAnalysis Planning MakingInvestmentDecisions MakingFinancingDecisions EnvironmentofManagerialFinance J Bistrova10 09 2010 10 Accountingvs FinancialView CashFlowsAccrualBasis recognizessalesrevenueandexpensesincurredtomakesaleattimeofsale CashBasis recognizesrevenuesandexpensesastheyoccur EnvironmentofManagerialFinance J Bistrova10 09 2010 11 Accountingvs FinancialView NassauCorporation asmallyachtdealer soldoneyachtfor 100 000inthecalendaryearjustended Theyachtwaspurchasedduringtheyearatatotalcostof 80 000 Althoughthefirmpaidinfullfortheyachtduringtheyear atyear endithasyettocollectthe 100 000fromthecustomer Goodsituation EnvironmentofManagerialFinance J Bistrova10 09 2010 12 Firm sGoals Profit EPSignorescriticalfactorsofthetimingofthereturns cashflowsavailabletocommonshareholders riskfactorsfacingthefirm EnvironmentofManagerialFinance J Bistrova10 09 2010 13 MaximizeShareholder sReturn EvaluatingShareholderWealthaddressesfactorsoftiming cashflowsandriskignoredbytheEPS Therefore MaximizingShareholderWealthisamorecomprehensivegoalforthefirm itsmanagersandemployees Thiscanbeexploredthrough economicvaluedadded andafocusonstakeholders EnvironmentofManagerialFinance J Bistrova10 09 2010 14 EconomicValueAdded EVA EVAmeasureswhetheraninvestmentcontributestoshareholderwealth EVAiscalculatedbysubtractingcostoffundsusedfromafter taxoperatingprofits Whilepopular EVAisessentiallyderivedfromtheconceptof netpresentvalue EnvironmentofManagerialFinance J Bistrova10 09 2010 15 EVACalculation EVA NOPAT WACC TC NOPAT NetProfitAfterTax aftertaxInterestExpense aftertaxInterestIncomeNOPAT Operatingprofitx 1 TaxRate TotalCapital TotalAssets CurrentLiabilities EnvironmentofManagerialFinance J Bistrova10 09 2010 16 EVACalculationExample CurrentLiabilities 13721mnUSD TotalAssets 48671mnUSDWACC 10 EnvironmentofManagerialFinance J Bistrova10 09 2010 17 Firm sFinancialGoals Maximizesales Maximizecashflow Maximizemarketshare Maximizeprofit Minimizecosts Maximizereturnonsales investment equity Ensureearningsstability Achievetargetgoalsforsales profits marketshareorreturn EnvironmentofManagerialFinance J Bistrova10 09 2010 18 Principal AgentProblem Wheneverownershipisindependentofmanagementthereexistspotentialproblemofconflicts Theowner sgoalsforthefirmarebestdescribedasmaximizingshareholderwealth Managersarealsoconcernedwithpersonalwealth jobsecurity lifestyle andbenefits Theseconcernsmayconflictwithshareholderinterests EnvironmentofManagerialFinance J Bistrova10 09 2010 19 SolvingAgencyProblem GoodcorporategovernancebytheBoardofDirectorsistheheartofanyresolution AgencyCosts thecostsofthisgovernance Monitoringcosts Bondingcosts Structuringcompensationcosts Marketforces suchasthepotentialforhostiletakeoverprovidesomedeterrence Legalforces fraud andfiduciarymisconductlawsaimtoactasdeterrentsaswell EnvironmentofManagerialFinance J Bistrova10 09 2010 20 SolvingAgencyProblem EnvironmentofManagerialFinance J Bistrova10 09 2010 21 AgencyProblem Identifyingagencyproblems costs andresolutionsExplainwhyeachofthefollowingsituationsisanagencyproblemandwhatcoststothefirmmightresultfromit Suggesthowtheproblemmightbedealtwithshortoffiringtheindividual s involved Thefrontdeskreceptionistroutinelytakesanextra20minutesoflunchtorunpersonalerrands b Divisionmanagersarepaddingcostestimatesinorde