Lecture 1.pptx
- 2. MBA Program Finance for Strategic Management Dr . Ehab Abdel Hady
- 3. AGENDA
- 4. Reading List Lawerence J. Gitman and Chad J. Zutter “Principles of Managerial Finance” Brigham Ehrhardt “Financial Management: Theory and Practice” Frank Reilly, “Investment Analysis and Portfolio Management” Lumby & Jones, Corporate Finance Theory and Practice” Ross, S.A., Westerfield, R.W., and J. Jaffe, “Corporate Finance” Needles, Powers, Mills and Anderson “ Principles of Accounting” Henry and David “Introduction to Financial Accounting”
- 5. Finance and the Firm • What Is Finance? • Finance can be defined as the science and art of managing money • What Is a Firm? • A firm is a business organization that sells goods or services • Firms exist because investors want access to risky investment opportunities • What Is the Goal of the Firm? • Maximize Shareholder Wealth • Maximize Profit
- 6. Managing the Firm The Managerial Finance Function • Financial Managers’ Key Decisions Investment Decisions Capital Budgeting Decisions Financing Decisions • Principles That Guide Managers’ Decisions Time Value of Money Tradeoff between Return and Risk Cash Is King Competitive Financial Markets
- 8. What are some forms of business organization a company might have as it evolves from a start-up to a major corporation? • Sole proprietorship • Partnership • Corporation
- 9. Starting as a Sole Proprietorship • Advantages: • Ease of formation • Subject to few regulations • No corporate income taxes • Disadvantages: • Limited life • Unlimited liability • Difficult to raise capital to support growth
- 10. Advantages and Disadvantages of a Corporation Advantages: – Unlimited life – Easy transfer of ownership – Limited liability – Ease of raising capital Disadvantages: – Double taxation – Cost of set-up and report filing
- 12. Becoming a Public Corporation and Growing Afterwards Initial Public Offering (IPO) of Stock: – Raises cash – Allows founders and pre-IPO investors to “harvest” some of their wealth – Subsequent issues of debt and equity Agency problem: : – managers may act in their own interests and not on behalf of owners (stockholders)
- 13. What should management’s primary objective be? • The primary objective should be shareholder wealth maximization, which translates to maximizing stock price. • Should firms behave ethically? YES! • Do firms have any responsibilities to society at large? YES! Shareholders are also members of society.
- 14. What three aspects of cash flows affect an investment’s value? • Amount of expected cash flows (bigger is better) • Timing of the cash flow stream (sooner is better) • Risk of the cash flows (less risk is better)
- 15. What are “free cash flows (FCF)”? • Free cash flows are the cash flows that are: • Available (or free) for distribution • To all investors (stockholders and creditors) • After paying current expenses, taxes, and making the investments necessary for growth.
- 16. Determinants of Free Cash Flows • Sales revenues – Current level – Short-term growth rate in sales – Long-term sustainable growth rate in sales Operating costs (raw materials, labor, etc.) and taxes Required investments in operations (buildings, machines, inventory, etc.)
- 17. What is the weighted average cost of capital (WACC)? The weighted average cost of capital (WACC) is the average rate of return required by all of the company’s investors (stockholders and creditors).
- 18. What factors affect the weighted average cost of capital? • Capital structure (the firm’s relative amounts of debt and equity) • Interest rates • Risk of the firm • Stock market investors’ overall attitude toward risk
- 19. Who are the providers (savers) and users (borrowers) of capital? Households: Net savers Non-financial corporations: Net users (borrowers) Governments: Net borrowers Financial corporations: Slightly net borrowers, but almost breakeven
- 20. What are three ways that capital is transferred between savers and borrowers? •Direct transfer (e.g., corporation issues commercial paper to insurance company) •Through an investment banking (e.g., IPO, seasoned equity offering, or debt placement) •Through a financial intermediary (e.g., individual deposits money in bank, bank makes commercial loan to a company)
- 21. What are some financial intermediaries? • Commercial banks • Savings & Loans, mutual savings banks, and credit unions • Life insurance companies • Mutual funds • Pension funds
- 22. What are some types of markets? •A market is a method of exchanging one asset (usually cash) for another asset. •Physical assets vs. financial assets •Spot versus future markets •Money versus capital markets •Primary versus secondary markets
- 23. What four factors affect the cost of money? - Production opportunities - Time preferences for consumption - Risk - Expected inflation
- 24. THANK YOU
Editor's Notes
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