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Topic 1 - 2023 - VA

The document discusses the role of the financial manager and their key responsibilities which include capital budgeting, financing, and working capital management decisions. It also examines the objective of maximizing shareholder wealth, forms of business organization, managing the financial function, and how agency conflicts can affect the goal of maximizing shareholder value.

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23 views8 pages

Topic 1 - 2023 - VA

The document discusses the role of the financial manager and their key responsibilities which include capital budgeting, financing, and working capital management decisions. It also examines the objective of maximizing shareholder wealth, forms of business organization, managing the financial function, and how agency conflicts can affect the goal of maximizing shareholder value.

Uploaded by

nguyentrantoquynhtq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Topic 1

The financial manager


and the company

Learning objectives
1.1 identify the key financial decisions facing the financial
manager of any company
1.2 identify the basic forms of business organisation
1.3 describe the typical organisation of the financial function in a
large company
1.4 explain why maximising the current value of the company’s
shares is the appropriate goal for management
1.5 discuss how agency conflicts affect the goal of maximising
shareholder value

1
The role of the financial manager

• Three fundamental decisions in financial management:


1. The capital budgeting (investment) decision:
– Which productive assets should the firm buy?
2. The financing (capital structure) decision:
– How should the firm finance or pay for assets?
3. Working capital management decisions:
– How should day‐to‐day financial matters be
managed?

The role of the financial manager

• The objective of managers:


– Should be to maximise the wealth of the
shareholders.
– A company also has other stakeholders that rely on it,
for example: maximising the share price
• Managers: salaries, bonuses.
• Employees: wages.
• Creditors: interest & principal.
• Suppliers: pay for goods/services.
• Government: tax.

Conflict of interest between the managers & shareholders => Enron

2
Forms of business organisation

• Sole traders:
- Is the simplest type of business to start and the least
regulated.
- Keeps all the profits from the business.
- Doesn’t share decision making.
- All company income is taxed as personal income.
- Has unlimited liability for all business debts and other
obligations of the company.

Forms of business organisation

• Partnership:
- Has the same basic advantages and disadvantages as
a sole trader.
- Has access to more capital, knowledge, experience
and skills.
- When a transfer of ownership takes place the
partnership is terminated, and a new partnership is
formed.

3
Forms of business organisation

• Company:
- Is a legal entity. In a legal sense, it is a “person”
distinct from its owners.
- The owners of a company are its shareholders.
- A major advantage of the company form of business
is that shareholders have limited liability.

Managing the financial function

• Chief Executive Officer (CEO):


- Ultimate management responsibility and decision‐
making power in the firm.
- Reports directly to the board of directors, which is
accountable to the company’s owners.

4
Managing the financial function

• Chief Financial Officer (CFO):


– Reports directly to the CEO and manages all aspects
of the company’s financials.
– CFO’s Key Financial Reports:
• The Controller prepares financial statements,
oversees the firm’s cost accounting systems,
prepares taxes, and works closely with the firm’s
external auditors.

The goal of the company

• Why not maximise accounting profits? Short-term (no clear)


- Accounting profits are not necessarily the same as
cash flows.
- Profit maximisation does not tell us the timing cash
flows are to be received.
- Profit maximisation ignores the uncertainty or risk
associated with cash flows.

5
The goal of the company
Reflects the value of the company
• Maximise the value of the company’s share price:
- When analysts and investors determine the value of a
company’s share price, they consider:
• The size of the expected cash flows.
• The timing of the cash flows.
• The riskiness of the cash flows. Managing the impact of external factors
• The mechanism for determining share prices is based
predominately on cash‐flows from correct and well
executed business decisions.

Agency conflicts: separation of


ownership and control
• Ownership and control:
- For large companies, the ownership of the firm is
spread over a number of shareholders and the
company’s owners may effectively have little control
over management.
- Management may make decisions that benefit their
self‐interest rather than those of the shareholders.

6
Agency conflicts: separation of
ownership and control
• Agency relationships:
– An agency relationships arises whenever one party,
called the principal, hires another party, called the
agent.
– Agents have a fiduciary duty to shareholders to put
shareholders interests above their own.

• Agency costs:
– The costs of the conflict of interest between the
company’s owners and its management.

Agency conflicts: separation of


ownership and control
• Aligning the interests of management and shareholders:
– Board of directors
– Management compensation
– Managerial labour market
– Large shareholders
– The takeover market
– Legal & regulatory environment

7
Summary

• Identify the key financial decisions facing the financial


manager of any company.
• Strengths, weaknesses of the basic forms of business
organisation.
• Corporate goal should be about maximising the current
value of the company's share.
• Presence of agency conflicts affect the goal of
maximising shareholder value.

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