Financial Management

Maximizing the price of firm’s stock will maximize value of a firm and the wealth of its shareholders/owners
3 fundamental decisions in financial management
- Capital budgeting: identify which long-term assets to acquire to maximize net benefits for the firm
  - affect long-term assets (productive assets, tangible or intangible)
- Financing: determine best way to pay for for short-term and long-term assets
  - determine firm’s cpital structure
  - affect long-term debt and equity thatwill be used to finance firm’s long-term productive asset and net working capital
- Working capital: decide how to manage short-term resources and obligations by adjusting current assets and current liabilities to promote growth in cash flow
  - affect current asset and current liabilities
BOD is representative of all shareholders
- mostly large shareholders
- sometimes independent experts
- Consists of:
  - audit comittee
  - governance comittee
  - remuneration committee: manage composation and performance policies
  - Nomination committee
  - Risk committe
  - Investment committee

Most common forms	Sole proprietorship	Partnership	Corporation
Ad	- easiest to create - easiest to dissolve - right to all profit	- more equity and expertise - limited liability for some owners	- protects personal asset - no shareholder liability - easiest to change ownership - greated source of fund
dis	- unlimited liabilities - Equity from 1 owner or business profit - Taxed once (business, personal) - difficult to transfer ownership	- shared control - shared profit - harder to dissolve	- difficult & expensive to establish - dilute individual control - taxed twice

A limited liability partnership (LLP). An LLP combines some of the limited liability characteristics of a corporation with the tax advantage of a partnership
limited liability company (LLC). LLCs also provide limited liability to the people who make the business decisions in the firm while enabling all investors to retain the flow-through tax advantages of a limited partnership

Positions reporting to the CFO
- Treasurer
- Risk manager
- Controller
- Internal Auditor
External auditor: creditors and investors require independent audits
The audit committee: powerful subcomittee of the BOD
- Oversee accounting function and preparation of firm’s financial statements
- conducts investigations of significant fraud, theft
The Compliance and Ethics Director: oversees three mandated programs
1. a compliance program that ensures that the firm complies with federal and state laws and regulations
2. an ethics program that promotes ethical conduct among executives and other employees
3. a compliance hotline, which must include a whistleblower program

Why not maximize market share? Giving away for free will increase market share but not cash flow
Why not maximize profit? Sell everything now and receive cash in far future → no cash flow
Maximizing value of firm’s stock, consider
- future cash flows
- timing of future cash flows
- risk of having to wait for cash flows
Good cash flow → have positive residual cash flow → greater firm value
Management decisions affect cash flows → affect stock prices

Managers might act in their own self-interest rather than long term value of the firm
An Agency relationship is created when the owner (a principal) of a business hires an employee (agent)
- → separate control and ownership → agency conflict
Agency cost: costs that arise from incurring and preventing conflicts of interest between a firm’s owners and its managers
- might reduce positive residual cash flow, stock price, and shareholder wealth
- can be reduced by:
  - increased oversight
  - aligning incentives
    - Board of directors
    - Management compensation
    - Managerial labor market
    - Internal competition among managers
    - Large stockholders
    - Corporate raiders search for takeover targets
    - Legal and regulatory constraints limit managerial behavior

StrixTheKiet Notes