The Role of Financial Management

• What is Financial Management?
• The Goal of the Firm
• Organization of the Financial Management Function

What is Financial Management?

Concerns the acquisition, financing, and management of assets with some overall goal in mind.
Investment Decisions

• What is the optimal firm size?
• What specific assets should be acquired?
• What assets (if any) should be reduced or eliminated?

Financing Decisions

• What is the best type of financing? 
• What is the best financing mix?
• What is the best dividend policy?
• How will the funds be physically acquired?

Asset Management Decisions

• How do we manage existing assets efficiently?
• Financial Manager has varying degrees of operating responsibility over assets.
• Greater emphasis on current asset management than fixed asset management.

What is the Goal of the Firm?

Maximization of Shareholder Wealth!
Value creation occurs when we maximize the share price for current shareholders.
Shortcomings of Alternative Perspectives

• Could increase current profits while harming firm (e.g., defer maintenance, issue common stock to buy T-bills, etc.).
• Ignores changes in the risk level of the firm.
• Does not specify timing or duration of expected returns.
• Ignores changes in the risk level of the firm.
• Calls for a zero payout dividend policy.

Strengths of Shareholder Wealth Maximization

• Takes account of: current and future profits and EPS;  the timing, duration, and risk of profits and EPS; dividend policy; and all other relevant factors.
• Thus, share price serves as a barometer for business performance.

The Modern Corporation
There exists a SEPARATION between owners and managers.

Role of Management

• An agent is an individual authorized by another person, called the principal, to act in the latter’s behalf.

Agency Theory

• Agency Theory is a branch of economics relating to the behavior of principals and their agents.
• Incentives include stock options, perquisites, and bonuses.

Social Responsibility

• Wealth maximization does not preclude the firm from being socially responsible.
• Assume we view the firm as producing both private and social goods.  
• Then shareholder wealth maximization remains the appropriate goal in governing the firm.

Organization of the Financial Management Function  Texas Instruments BAII+

• Integrated throughout the chapters
• A useful financial tool
• Does NOT replace financial understanding

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