Financial Management In Organizations

Financial Management in Organizations Hello and welcome to the first week of Financial Management in Organizations. This week we shall cover some of the basic concepts of Corporate Finance. Many of these you have already learned in earlier courses, so this should be a review. We start with the 3 main topics of Corporate Finance. These topics are: the first one is Project Selection. What projects should a firm undertake? This decision is referred to as Capital Budgeting. The second topic is the Optimal Mix Of Ownership for a firm. That is, how should the ownership of the firm be distributed among different investors who shall be given different legal rights. The third topic is Short-Term Liquidity Needs of a Firm. A firm needs to keep enough liquid reserves to be able to pay suppliers and other creditors as required. However, liquid reserves are costly and the firm has to find the best trade-off. This is also called Working Capital Management. After these 3 topics of Corporate Finance, we will next consider the proper goal for a firm’s management. Profit Maximization, by legal means only, should be the goal of for-profit firms. Profit Maximization results in the maximization of the firm’s equity market value and, consequently, shareholder wealth. It also leads to efficient allocation of resources in the economy. In this lecture, we shall also study Capital Markets. Capital Markets are markets for long-term debt and for equity of firms. In Capital Markets, brokers act as agents for the customer in buying and selling securities and never actually acquire or own the securities themselves. We shall end this lecture discussing the preparation of Financial Statements and Analysis of Financial Ratios.

Week 1 Objectives Financial Management for Organizations Welcome to this week’s lesson on the basic concepts of corporate finance. Many of these you learned in an earlier course, so this should be a review. Objectives for Week 1: 1) Students will learn how to select the optimal capital structure for a firm.

2) Students will learn how to meet the short-term liquidity needs of a firm. 3) Students will study Primary and Secondary Capital Markets to operationalize the raising capital for firms. 4) Students will study Financial Regulation to enable compliance with legal requirements. 5) Students will learn how to retrieve Financial Information and calculate Financial Ratios.

Overview of Financial Management Welcome to the Financial Management course. This week we will cover some of the basic concepts of corporate financial management.

Topics

There are three main topics in corporate finance: •

Capital Budgeting: This topic revolves around project selection. What projects, or investments, should a firm undertake?

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Capital Structure: What mix of ownership should a firm have? That is, how should the ownership of the firm be distributed among different stakeholders with different legal rights? The most common form is a mix of debtholders and equity holders. Debtholders have a fixed but senior claim to assets of the firm, and after the debtholders are repaid, the equity holders own the rest. There are variations around this basic idea, for example, convertible debt. Convertible debt is debt that may be converted to equity at the discretion of the owners. This mix of ownership is referred to as theCapital Structure of the firm. Working Capital Management: How should the firm meet its short-term liquidity needs? A firm needs to keep enough liquid reserves to be able to pay suppliers and other creditors as required. However, liquid reserves are costly as they either earn a low rate of return, or they need to be paid for (like short-term borrowings using a credit line from a bank). So the firm’s financial managers have to trade-off the cost of failing to meet short-term obligations to the benefit of not having costly short-term liquid reserves. This is called Working Capital Management.

Goal of For-Profit Business Profit maximization is the goal of for-profit firms. Profit maximization also results in the maximization of the firm’s equity market value and, consequently, shareholder wealth.

Knowledge Check 1/1 point (ungraded)

This Non-Graded assessment has been designed to help you test your knowledge on the topic. Since it is Not Graded, you will have the ability to take it multiple times. How should managers run a firm? HTMLDirect

To maximize salaries for the managers

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To maximize taxes paid to the government

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To maximize profits for stockholders while obeying the

Capital Markets

Capital markets are markets for long-term debt (with a maturity of over one year) and for equity of firms. In the capital markets, brokers act as agents for the customer in buying and selling securities and never actually acquire or own the securities. Financial markets are either primary or secondary. • The primary market is for new issues of government and corporate securities, with investment banking firms underwriting new securities and reselling them. • The secondary market is where owners of securities resell to each other. • The dealer’s market is the secondary market for dealers to buy and sell stocks and long-term debt to each other. Today this primarily done electronically. • The auction market has a physical location (like Wall Street), and is a place where buyers and sellers try to meet to make a sale/buy. Examples of auction markets are NYSE and the AMEX. Financial Regulation

Historically, most regulation has focused on the disclosure of relevant information, thereby putting all investors on an equal playing field. There have been many regulations enacted over the years. We will mention three important regulations here: • The Securities Act of 1933, the Securities Exchange Act of 1934, and SarbanesOxley Act of 2002 • The 1933 Act focuses on the issuance of securities while the 1934 Act established the U.S. Securities and Exchange Commission (SEC) and addressed other regulatory issues, such as insider trading and corporate reporting. • Following the scandals at Enron, WorldCom, and Tyco, among others, the Sarbanes-Oxley Act was enacted in 2002. This Act significantly increased the auditing and reporting requirements that public firms face, and it also explicitly placed the responsibility for any fraud on the corporate directors. • As with any law, however, there is a cost. In response to the added burden, many (particularly small) firms have delisted and others have foregone going public. For others, the cost of compliance has significantly increased, thereby reducing profits.