Kế toán, kiểm toán - Chapter 1: An overview of financial management

Chapter 1An Overview of Financial Management1Topics in ChapterBasic Goal: to create shareholder valueAgency relationships:Stockholders versus managersStockholders versus creditorsTransparency in financial reportingThe Cost of Money2Why is corporate finance important to all managers?Corporate finance provides the skills managers need to:Identify and select the corporate strategies and individual projects that add value to their firm.Forecast the funding requirements of their company, and devise strategies for acquiring those funds.3What should be management’s primary objective?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.4Is maximizing stock price good for society, employees, and customers?Employment growth is higher in firms that try to maximize stock price. On average, employment goes up in: firms that make managers into owners (such as LBO firms)firms that were owned by the government but that have been sold to private investors5Is maximizing stock price good? (Continued)Consumer welfare is higher in capitalist free market economies than in communist or socialist economies.Fortune lists the most admired firms. In addition to high stock returns, these firms have:high quality from customers’ viewemployees who like working there6What 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)7Free Cash Flows (FCF)Free cash flows are the cash flows that are available (or free) for distribution to all investors (stockholders and creditors).FCF = sales revenues - operating costs - operating taxes - required investments in operating capital. 8What is the weighted average cost of capital (WACC)? WACC is the average rate of return required by all of the company’s investors.WACC is affected by:Capital structure (the firm’s relative use of debt and equity as sources of financing)Interest ratesRisk of the firmInvestors’ overall attitude toward risk9What factors affect the weighted average cost of capital?Capital structure (the firm’s relative amounts of debt and equity)Interest ratesRisk of the firmStock market investors’ overall attitude toward risk 10What determines a firm’s value?A firm’s value is the sum of all the future expected free cash flows when converted into today’s dollars:Value =FCF1FCF2FCF∞(1 + WACC)1(1 + WACC)∞(1 + WACC)2++ 11An agency relationship arises whenever one or more individuals, called principals, (1) hires another individual or organization, called an agent, to perform some service and (2) then delegates decision-making authority to that agent.What is an agency relationship?12No agency problem would exist. A potential agency problem arises whenever the manager of a firm owns less than 100 percent of the firm’s common stock, or the firm borrows. You own 100 percent of the firm.If you are the only employee, and only your money is invested in the business, would any agency problems exist?13An agency relationship could exist between you and your employees if you, the principal, hired the employees to perform some service and delegated some decision-making authority to them.Would hiring additional people create agency problems?14If you needed additional capital to buy computer inventory or to develop software then you might end up with agency problems if the capital is acquired from outside investors.Might acquiring capital lead to agency problems?15Agency problems are less for secured than for unsecured debt, and different between stockholders and creditors. So it matters whether the new capital comes in the form of an unsecured bank loan, a bank loan secured by your inventory of computers, or from new stockholders.Does the source of the capital affect agency problems?16There are 2 potential agency conflicts:Conflicts between stockholders and managers.Conflicts between stockholders and creditors.17Would expansion increase or decrease potential agency problems?Increase. If you expanded to additional locations you could not physically be at all locations at the same time. Consequently, you would have to delegate decision-making authority to others.18Creditors can protect themselves by (1) having the loan secured and (2) placing restrictive covenants in debt agreements. They can also charge a higher than normal interest rate to compensate for risk.What actions might make a loan feasible?19Structuring compensation packages to attract and retain able managers whose interests are aligned with yours.Threat of firing.Increase “monitoring” costs by making frequent visits to “off campus” locations.(More)What actions might mitigate your agency problems if you expanded beyond your home campus?20Would going public in an IPO increase or decrease agency problems?By going public through an IPO, your firm would bring in new shareholders. This would increase agency problems, especially if you sell most of your stock and buy a yacht. You could minimize potential agency problems by staying on as CEO and running the company.21A manager might inflate a firm's reported earnings or make its debt appear to be lower if he or she wanted the firm to look good temporarily. For example just prior to exercising stock options or raising more debt.Why might you want make your financial statements look artificially good?22If the firm is publicly traded, the stock price will probably drop once it is revealed that fraud has taken place. If private, banks may be unwilling to lend to it, and investors may be unwilling to invest more money.What are the potential consequences of inflating earnings or hiding debt?23“Reasonable” annual salary to meet living expensesCash (or stock) bonusOptions to buy stock or actual shares of stock to reward long-term performanceTie bonus/options to EVAWhat kind of compensation program might you use to minimize agency problems?24Yes! Investors are forcing managers to focus on value maximization. Successful firms (those who maximize shareholder value) will not continue to promote individuals who lack an understanding of financial management.Are financial management skills important to your career?25Students who understand this focus have a major advantage in the job market. This applies both to the initial job, and the career path that follows.26What is transparency in financial reporting?When all market participants have reliable, accurate information about a particular company.27What safeguards help market transparency?Public companies use GAAP rules established by the FASB for accountingPublic companies must have their financial statements auditedThese statements are made available to the investing public by the SECFirms must release information to everyone at the same time28What is Sarbanes-Oxley?An act passed in 2002 that established new regulations for auditors, corporate officers, and securities analysts.The goal was to make it less likely that companies and securities analysts would mislead investors, and increase the penalties for doing so.29Cost of MoneyWhat do we call the price, or cost, of debt capital?The interest rateWhat do we call the price, or cost, of equity capital?Cost of equity = Required return = dividend yield + capital gain30What four factors affect the cost of money?Production opportunitiesTime preferences for consumptionRiskExpected inflation31What economic conditions affect the cost of money?Federal Reserve policiesBudget deficits/surplusesLevel of business activity (recession or boom)International trade deficits/surpluses32What international conditions affect the cost of money?Country risk. Depends on the country’s economic, political, and social environment.Exchange rate risk. Non-dollar denominated investment’s value depends on what happens to exchange rate. Exchange rates affected by:International trade deficits/surplusesRelative inflation and interest ratesCountry risk33What two factors lead to exchangerate fluctuations?Changes in relative inflation will lead to changes in exchange rates.An increase in country risk will also cause that country’s currency to fall.34Financial SecuritiesDebtEquityDerivativesMoneyMarketT-BillsCD’sEurodollarsFed FundsOptionsFuturesForward contractCapitalMarketT-BondsAgency bondsMunicipalsCorporate bondsCommon stockPreferred stockLEAPSSwaps35Typical Rates of ReturnInstrumentRate (July 2008)U.S. T-bills 1.96%Banker’s acceptances2.80Commercial paper2.31Negotiable CDs3.08Eurodollar deposits3.25Commercial loans:Tied to prime5.00 + or LIBOR3.12 +(More . .)36Typical Rates (Continued)InstrumentRate (April 2007)U.S. T-notes and T-bonds 3.83%Mortgages 6.04Municipal bonds 4.56Corporate (AAA) bonds 5.49Preferred stocks6% to 9%Common stocks (expected)9% to 15%37