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Chapter 1 Goals and Functions of Finance

PowerPoint Presentation Financial Management And Policy Twelfth Edition by James C. Van Horne Stanford University Prepared by Richard Gendreau Bemidji State University. Chapter 1 Goals and Functions of Finance. Financial Goal. Maximize Shareholder Wealth. Objective of a Company.

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Chapter 1 Goals and Functions of Finance

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  1. PowerPoint PresentationFinancial Management And PolicyTwelfth EditionbyJames C. Van HorneStanford UniversityPrepared byRichard GendreauBemidji State University

  2. Chapter 1Goals and Functions of Finance

  3. Financial Goal Maximize Shareholder Wealth

  4. Objective of a Company • Create value for its shareholders • Market price of common stock (C/S) • Function of finance • Investment • Financing • Dividend/share repurchase

  5. Value Creation • Niche in an attractive industry • Imperfections in the financial markets

  6. Maximization of EPS • Does not consider • Timing • Duration • Risk or uncertainty • Dividends • Usually is not the same as maximizing market price per share

  7. Agency Problems • Management/stockholders • Creditors/equityholders

  8. Incentives Stock options Bonuses Perquisites Monitoring Bonding Reviewing Auditing Limiting management decisions Dealing With Agency Problems

  9. Principle of Maximization of Shareholder Wealth • Rational guide for running a business • Efficient allocation of resources in society • Objective in making financial decisions

  10. Allocation of Savings in an Economy • Occurs on the basis of expected risk and return • Market value of common stock reflects the market’s trade-off between risk and return

  11. Social Responsibility • Protecting consumers • Paying fair wages • Maintaining fair hiring practices • Maintaining safe working conditions • Supporting education • Involved in environmental issues • Impact on stakeholders

  12. Functions of Finance • Investment decisions • Financing decisions • Dividend/share repurchase decision

  13. New Investment Decision • Most important of three functions • Allocation/reallocation of capital • Determines • The total amount of assets • Composition of assets • Business-risk complexion of the firm • Appropriate acceptance criterion (or required rate of return)

  14. Existing Investment Decision • Efficient management of current assets • Proper level of liquidity • Allocating capital to fixed assets

  15. External Investment Opportunities • Mergers and acquisitions • Domestic and international • Globalization of finance

  16. Financing Decision • Determining the best financing mix • Optimal capital structure • Maximize market price per share • Variation in capital structure can impact firm value • Interface with capital markets • Ever-changing environment • Manage financial risk with hedging devices • Corporate restructuring • New financing sources • Existing financing sources

  17. Dividend/Share Repurchase Decision • Amount of cash to distribute to stockholders • Dividend policy • % of earnings paid • Stability of dividends • Stock dividend • Splits • Share repurchase • Determines the amount of earnings retained • Financial signals to the market

  18. Making Optimal Decisions • Interrelated decisions • Effect on the value of the firm • Financial analysis

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