1) What is Finance?
a. Finance can be defined as the science and art of managing money.
b. At the personal level, finance is concerned with individuals’ decisions about how much
of their earnings they spend, how much they save, and how they invest their savings.
c. In a business context, finance involves the same types of decisions: how firms raise
money from investors, how firms invest money in an attempt to earn a profit, and
how they decide whether to reinvest profits in the business or distribute them back to
investors.
d. Career Opportunities in Finance: Managerial Finance
2) Managerial finance is concerned with the duties of the financial manager working in a
business.
a. Financial managers administer the financial affairs of all types of businesses—private
and public, large and small, profit-seeking and not-for-profit.
i. Planning
ii. Financing
iii. Investing
iv. Very involved with strategic planning and implementation
b. The recent global financial crisis and subsequent responses by governmental
regulators,
i. increased global competition,
ii. Increased rapid technological change
iii. increased the importance and complexity of the financial manager’s duties.
iv. increased demand for financial experts who can
1. manage cash flows in different currencies
2. protect against the risks that naturally arise from international
transactions.
3) Legal Forms of Business Organization
a. A sole proprietorship is a business owned by one person and operated for his or her
own profit.
b. A partnership is a business owned by two or more people and operated for profit.
c. A corporation is an entity created by law. Corporations have the legal powers of an
individual in that it can sue and be sued, make and be party to contracts, and acquire
property in its own name.
d. Finance theories and techniques apply to all.
4) What is the Goal of the firm?
a. Is there a benchmark that serves as an appropriate measure of whether an action
should proceed or not?
i. Maximize profit
ii. Minimize expenses
iii. Maximize marketing share
iv. Maximize share price
v. Maximize stakeholder wealth
b. Goal of the Firm: Maximize Profit?
c. Profit maximization may not lead to the highest possible share price for at least three
reasons:
i. Timing is important—the receipt of funds sooner rather than later is preferred
ii. Profits do not necessarily result in cash flows available to stockholders
iii. Profit maximization fails to account for risk
d. Goal of the Firm: What About Stakeholders?
e. Stakeholders are groups such as employees, customers, suppliers, creditors, owners,
and others who have a direct economic link to the firm.
f.
A firm with a stakeholder focus consciously avoids actions that would prove
detrimental to stakeholders. The goal is not to maximize stakeholder well-being but to
preserve it.
g. Such a view is considered to be "socially responsible."
5) The Role of Business Ethics
a. Business ethics are the standards of conduct or moral judgment that apply to persons
engaged in commerce.
b. Violations of these standards in finance involve a variety of actions: “creative
accounting,” earnings management, misleading financial forecasts, insider trading,
fraud, excessive executive compensation, options backdating, bribery, and kickbacks.
c. Negative publicity often leads to negative impacts on a firm
6) The Role of Business Ethics: Ethics and Share Price
a. Ethics programs seek to:
i. reduce litigation and judgment costs
ii. maintain a positive corporate image
iii. build shareholder confidence
iv. gain the loyalty and respect of all stakeholders
b. The expected result of such programs is to positively affect the firm’s share price.
c. Is there a place in business for the “Golden Rule”??
7) Managerial Finance Function: Relationship to Economics
a. Financial managers must understand the economic framework and be alert to the
consequences of varying levels of economic activity and changes in economic policy.
b. They must also be able to use economic theories as guidelines for efficient business
operation.
c. Marginal cost–benefit analysis is the economic principle that states that financial
decisions should be made and actions taken only when the added benefits exceed the
added costs
8) Managerial Finance Function: Relationship to Accounting
a. The firm’s finance and accounting activities are closely-related and generally overlap.
b. One major difference in perspective and emphasis between finance and accounting is
that accountants generally use the accrual method while in finance, the focus is on
cash flows.
c. Finance and accounting also differ with respect to decision-making:
d. Accountants devote most of their attention to the collection and presentation of
financial data.
e. Financial managers evaluate the accounting statements, develop additional data, and
make decisions on the basis of their assessment of the associated returns and risks.
9) Governance and Agency: Corporate Governance
a. Corporate governance refers to the rules, processes, and laws by which companies are
operated, controlled, and regulated.
b. It defines the rights and responsibilities of the corporate participants such as the
shareholders, board of directors, officers and managers, and other stakeholders, as
well as the rules and procedures for making corporate decisions.
10) Governance and Agency: Individual versus Institutional Investors
a. Individual investors are investors who own relatively small quantities of shares so as
to meet personal investment goals.
b. Institutional investors are investment professionals, such as banks, insurance
companies, mutual funds, and pension funds, that are paid to manage and hold large
quantities of securities on behalf of others.
c. Unlike individual investors, institutional investors often monitor and directly influence
a firm’s corporate governance by exerting pressure on management to perform or
communicating their concerns to the firm’s board.
i. Not historically the way the world worked. This has helped individual
investors by giving some assurance as to confidence of management ands
their actions.
11) Governance and Agency: Government Regulation
a. The Sarbanes-Oxley Act of 2002:
b. established an oversight board to monitor the accounting industry;
c. tightened audit regulations and controls;
d. toughened penalties against executives who commit corporate fraud;
e. strengthened accounting disclosure requirements and ethical guidelines for corporate
officers;
f.
established corporate board structure and membership guidelines;
g. established guidelines with regard to analyst conflicts of interest;
h. mandated instant disclosure of stock sales by corporate executives;
i.
increased securities regulation authority and budgets for auditors and investigators.
12) Governance and Agency: The Agency Issue
a. A principal-agent relationship is an arrangement in which an agent acts on the behalf
of a principal. For example, shareholders of a company (principals) elect management
(agents) to act on their behalf.
b. Agency problems arise when managers place personal goals ahead of the goals of
shareholders.
c. Agency costs arise from agency problems that are borne by shareholders and
represent a loss of shareholder wealth.
13) The Agency Issue:
a. How can we get managers to act in shareholder best interests?
i. Labor market for employment
ii. Labor market for takeovers
iii. Auditing the companies books
iv. Compensation plans
1. Incentive plans tie management compensation to share price; one
example involves the granting of stock options.
2. Performance plans tie management compensation to measures such
as EPS or growth in EPS.
Chapter One Class notes Intro to Finance
What is Finance?
1. What are the tasks of the financial manager?
From Harvard Business.org video
•
http://www.youtube.com/watch?feature=player_detailpage&v=aJsmJsd6GIw
1. What is the difference between Accounting and finance?
2. What is meant by “keeping score”?
3. Universal score points? What is meant by this?
4. What is meant by transparent?
Global Business
1. What has this shift done to the ordinary business person?
Forms of Business
http://www.youtube.com/watch?feature=player_detailpage&v=pPVkG9krOMI
1. Where do people go to get money for a new business?
2. What characteristics are the primary drivers of choice of the type of business organization?
Goals
1. What is a benchmark?
2. How would you describe the following:
–
Maximize profit
–
Minimize expenses
–
Maximize market share
–
Maximize shareholder wealth
Ethics
Part One
http://www.youtube.com/watch?list=PLQcenkMor85pMNCHKTG2S79A8AL_9Ssw&v=ntJMyx_zVgY&feat
ure=player_detailpage
Part Two
http://www.youtube.com/watch?v=QFPW3jB0kR8&list=PLQcenkMor85pMNCHKTG2S79A8AL_9Ssw&fe
ature=player_detailpage
1. What is ethics?
2. Warren Buffet once said (paraphrased) that in deciding on acting ask yourself: If this was in
the newspaper tomorrow (and your mother was reading the article); How would you feel?
3. Who are the stakeholders of a business?
4. Are competitors stakeholders?
Agency
1.
2.
3.
4.
5.
What is it?
Why does it exist? Does it exist?
What does it do?
How can we try to stop it?
What is a hostile takeover?
Matter of Fact—Forbes.com CEO Performance vs. Pay
The Business man!!!
http://www.youtube.com/watch?feature=player_detailpage&v=8SHt44I9S6k
BUA321 Ch01 Research 45 points
Go to http://finance.yahoo.com
Step 1
Pick a company to explore.
Enter the company name next to the ticker symbol
ABT
GE
ADP
GOOG
BA
HOG
CSCO
KFT
DIS
BRKB
DOW
PFE
DUK
TAP
PG
XOM
RL
(12)
Input the company’s Name? _____________
Ticker symbol?
____________
Go to summary
What is the most recent dividend? _______
Go to profile
1)
CEO? ______________________
2) How many employees? ____________
Age? ______
3) What industry and sector is the company in?
Industry ________________
Sector _________________
A) Click on the Sector
Components of the sector (list the 4 largest components of the
sector sorted by market cap)
1)
2)
3)
4)
(25)
B) Industry Leaders and laggards
In the table below list the names of the top 3 leaders and the
bottom 3 laggards for the industry for each variable below include
the number listed for that company
a) price performance intraday
b) free cash flow growth
c) market capitalization
d) PE ratio
Enter company names and the value in the blocks.
Leaders
Market cap
Price performance
PE
FCF growth
Price performance
PE
FCF growth
Laggards
Market cap
What companies seem to show up frequently? From observation who is the best and the
worst?
Where is your company?
4) What is the company’s index membership?
Copy and paste the financial statements into this document.
Highlight the statement, right click to copy.
Paste special as a picture into the word document.
Chapter 1 Case
Assessing the Goal of Sports Products, Inc.
Loren Seguara and Dale Johnson both work for Sports Products, Inc., a major
producer of boating equipment and accessories. Loren works as a clerical assistant
in the Accounting Department, and Dale works as a packager in the Shipping
Department. During their lunch break one day, they began talking about the
company. Dale complained that he had always worked hard trying not to waste
packing materials and efficiently and cost-effectively performing his job. In spite of
his efforts and those of his co-workers in the department, the firm’s stock price had
declined nearly $2 per share over the past 9 months. Loren indicated that she
shared Dale’s frustration, particularly because the firm’s profits had been rising.
Neither could understand why the firm’s stock price was falling as profits rose.
Loren indicated that she had seen documents describing the firm’s profit-sharing
plan under which all managers were partially compensated on the basis of the
firm’s profits. She suggested that maybe it was profit that was important to
management, because it directly affected their pay. Dale said, “That doesn’t make
sense, because the stockholders own the firm. Shouldn’t management do what’s
best for stockholders? Something’s wrong!” Loren responded, “Well, maybe that
explains why the company hasn’t concerned itself with the stock price. Look, the
only profits that stockholders receive are in the form of cash dividends, and this
firm has never paid dividends during its 20-year history. We as stockholders
therefore don’t directly benefit from profits. The only way we benefit is for the stock
price to rise.” Dale chimed in, "That probably explains why the firm is being sued by
state and federal environmental officials for dumping pollutants in the adjacent
stream. Why spend money for pollution control? It increases costs, lowers profits,
and therefore lowers management’s earnings!"
Loren and Dale realized that the lunch break had ended and they must quickly
return to work. Before leaving, they decided to meet the next day to continue their
discussion.
To Do:
a. What should the management of Sports Products, Inc., pursue as its
overriding goal? Why?
b. Does the firm appear to have an agency problem? Explain.
c. Evaluate the firm’s approach to pollution control. Does it seem to be ethical?
Why might incurring the expense to control pollution be in the best interests
of the firm’s owners despite its negative effect on profits?
d. Does the firm appear to have an effective corporate governance structure?
Explain any shortcomings.
e. On the basis of the information provided, what specific recommendations
would you offer the firm?