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Financial Management Theory and Practice

Tenth Edition

Chapter 1
Goals and Governance of the Firm
Instructor: Sanam Taimoor Institute of Business Management

Eugene F. Brigham Michael C. Ehrhardt

Topics
What is Financial Management Finance and You How are companies organized Goals of Corporations Business Ethics and Social Responsibility Agency Relationship

Chapter 1 Brigham & Ehrhardt 10 ed

What is Financial Management


The planning, directing, monitoring, organizing, and controlling of the monetary resources of an organization Main issues in financial management
Factors determining companys stock price Managers choices to add value Ensuring sufficient cash levels

Chapter 1 Brigham & Ehrhardt 10 ed

Finance and Your Career


Capital Markets and Institution
Stock Markets, Commodities Markets, Banks, Insurance Companies, Mutual Funds

Investments
Brokerage Houses Main function in investments:
Sales Analysis of individual securities Determining optimal mix of securities

Financial Management
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Forms of Organizations
Sole Proprietorship Partnership Corporations

Note: Read Pages 6-9

Chapter 1 Brigham & Ehrhardt 10 ed

Finance in Organizational Structure of the Firm


Board of Directors

CEO

Vice President Sales

Vice President Finance

Vice President Marketing

Treasurer

Controller

Credit Manger

Inventory Manager

Capital Budgeting Manager

Cost Accountant

Financial Accountant

Tax Accountant

Chapter 1 Brigham & Ehrhardt 10 ed

Goals of the Corporations


What should be the main goal of the organization? Stock Price Maximization and not Profit Maximization
Stockholders are society Consumer Benefit Employee Benefit

Chapter 1 Brigham & Ehrhardt 10 ed

How to maximize Stock Price?


What determines stock price?
Companys ability to generate cash flows now and in the future

Determinants of cash flows


Unit Sales After-tax operating margins Capital Requirement

Chapter 1 Brigham & Ehrhardt 10 ed

Ethics and Social Responsibility


Business Ethics
Standard of conduct and moral behavior A companys attitude and conduct towards its employees, customers, community and stockholders
(Fundamentals of Financial Management. Brigham and Houston 10th Edition)

Social Responsibility
Only shareholders interests or welfare of employees and society as well?
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Agency Relationship
Agency relationship arises when a principle hires an agent to perform duties on behalf of the principle Within financial management primary agency relationships are
Between stockholders and managers Between stockholders and creditors

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Agency Conflict
Occurs when agents behave in their own interests rather then those of the principles Ways to avoid agency conflicts
Managerial Compensation Direct intervention by shareholders Threat of firing Threat of takeover
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