Textbook Chapters 1,4 & 6

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Management and Organizational Studies
Management and Organizational Studies 2310A/B
Danny L Morrison

MOS 2310 1 Caroline Mackenzie CHAPTER 1 – An Overview of Financial Management and the Financial Environment • Forms of business organizations: 1. Proprietorship 2. Partnership 3. Corporation (conduct more business than other forms) Sole Proprietorship Partnership Corporation Who owns the Manager Partners Shareholders business? Managers and No No Usually owners separate? What is the Unlimited Unlimited Limited owner’s liability? Are the owner and No No Yes business taxed separately? Maximizing stock price  maximizing shareholder’s wealth: goal. FCF: Free cash flow. Many ways to increase these. FCF are cash flows available for distribution to all investors. FCF = sales revenues – operating costs – operating taxes – required investments in operating capital WACC: Weighted average cost of capital. • Transfers of capital between borrowers and savers take place: o By direct transfers o By transfers through investment banks o By transfers though financial intermediaries • ***Factors that affect the cost of money: o Production opportunities o Time preferences for consumption o Risk o Inflation  ***See these pages in the textbook! Esp. blue writing. Also pg. 20. Money markets: The markets for debt securities with maturities of less than 1 year. Capital markets: Markets for long-term debt and corporate stocks. MOS 2310 2 Caroline Mackenzie Primary markets: The markets in which corporations raise new capital. Secondary markets: Markets in which existing, already outstanding securities are traded among investors. Fixed-income market: Debt securities (ex: bond or any kind of loan). Over-the-counter exchange: Market has no fixed location, participants are linked electronically. Ex: currency market. th CLASS NOTES – SEPTEMBER 13 , 2011 ICP 1-1: Advantages and Disadvantages of a Corporation • Advantages: o Unlimited life o Easy transfer of ownership o Limited Liability o Ease of raising capital • Disadvantages: o Double taxation  Corp. taxed on their profit  Investors pay taxes on their dividend income o Higher setup cost o Endless report filing • Role of CFO: o Treasury function o Risk management o Controllership function o Communication What is the meaning of financial management??? It’s about the financing (getting the money) and the investment decision (what particular assets the company should actually buy). About where the money came from and where it goes. ICP 1-2: Goals of the Corporation • Maximize the value of the firm, which will in turn maximize shareholder wealth. • Profit maximization is not a well-defined objective, because… 1. Maximize which year’s profit? (Increase current profits but damage future years profits). 2. Increased future profits by cutting this year’s dividend. MOS 2310 3 Caroline Mackenzie 3. Calculate profits in different ways. • To maximize stockholder wealth: 1. Maximize the size of cash inflows 2. Speeding up (delaying) the timing of cash inflows (outflows) 3. Effectively dealing with the risk of cash flows ICP 1-3: Branch Manager This will actually hurt the value of the firm in the long term, because the new employees are not as efficient as the experienced ones. Agency problems: When personal goals of agents (managers) conflict with corporation goals. ICP 1-4: How do managers affect shareholder wealth? • Improve a firm’s ability to generate cash flows now and in the future by focusing on: o Amount of expected cash flows (bigger is better) o Timing of the cash flow stream (sooner is better) o Risk of the cash flow
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